IGB REIT’s 1Q18 core net profit of RM82.3m (+7% QoQ, +9% YoY) was within both ours and consensus expectations. Overall improvement in 1Q18 was mainly driven by (1) increase in rental income thanks to higher rental reversion; and (2) lower property operating expenses. We retain our forecast and maintain our BUY call with unchanged TP of RM1.75. We continue to like IGBREIT for its concentrated prime assets.

Within expectations. 1Q18 total revenue of RM136.8m (+1.8% QoQ, +2.3% YoY) translated into a core net profit of RM82.3m (+6.6% QoQ, +9.1% YoY). The results were within both ours and consensus expectations, accounting for 25.8% and 26.5%, respectively.

Dividend. IGB REIT has decided to change the distribution period from half-yearly to quarterly. Declared 1Q18 DPU of 2.48 sen per unit, representing a payout ratio of 95%, in line with our expectation.

QoQ. Total revenue for 1Q18 of RM136.8m increased by 1.8% against previous quarter of RM134.4m. This was lifted by the higher contribution from rental income (+3.3%) on the back of higher rental rates, but offset by lower other income (-3.8%). Core net profit also increases by 6.6% to RM82.3m from RM77.1m in 4Q17. The increase was due to higher rental income and lower property operating expenses.

YoY. Total revenue for 1Q18 increased by 2.3% compared to RM133.7 in 1Q17. This was mainly due the increase in both rental income (+2.7%) and higher other income (+1.1%). Likewise, core net profit too increases by 9.1%, and this was principally due to the higher rental income as a result of higher rental rates and also the lower property operating expenses.

High occupancy. Both prime assets: Mid Valley Megamall and The Gardens Mall are operating with high occupancy rates of close to 100%, driven by the strategic locations of the assets.

Outlook. We expect both Mid Valley Megamall and The Gardens Mall to continue generate positive tenant sales growths and rental reversion rates. We believe IGB REIT is shielded from challenging retail environment in Klang Valley due to the assets’ prime locations and high traffics.

Forecast. Maintain

Maintain BUY recommendation with unchanged TP of RM1.75 based on 2 years historical average yield spread of IGB REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 24 Apr 2018