IGB REIT’s 1H18 core net profit of RM152.4m (+6.5% YoY) was within both ours and consensus expectations. Overall, the increment in 1H was supported by higher rental income received and lower property operating expenses incurred. We retain our forecast and maintain our BUY call with unchanged TP of RM1.89. We continue to like IGBREIT for its concentrated prime assets, sustainable tenant sales growths and rental reversions.

Within expectations. 1H18’s revenue of RM264.8m (+1.4% YoY) translated into a core net profit of RM152.4m (+6.5% YoY). The results were within both ours and consensus expectations, accounting for 47.9% and 48.3%, respectively.

Dividend. Declared 2Q18 DPU of 2.14 sen per unit (2Q17: 4.38 sen per unit), representing a payout ratio of 95%, in line with our expectation. To recap, IGB REIT has changed the distribution period from half-yearly to quarterly since 1Q18.

QoQ. Revenue for 2Q18 of RM128.0m reduced by 6.4% against previous quarter of RM136.8m. This was mainly due to higher rental income received in the immediate preceding quarter as a result of higher rental rates. However, this was slightly mitigated by an increase in other income by 1.7%. Core net profit decreased by 14.7% to RM70.2m from RM82.3m in 1Q18. The decline was driven by lower rental income and higher property operating expenses in the current quarter.

YoY. 2Q18’s revenue increased by 0.5% as compared to RM127.3 in 2Q17. This was primarily caused by higher rental income in the current period, showcasing a 0.8% increment; nevertheless, it was slightly offset by a 0.5% decline from other income. As a result, core net profit increased by 3.6% mainly due to the higher rental income as well as lower property operating expenses in the current period.

YTD. Revenue for 6M18 of RM264.8m increased by 1.4% from RM261.0m in corresponding period 6M17. Essentially, the increment was contributed by higher rental income resulting from positive rental reversion. Normalized net profit of RM152.4m showed an increase of 6.5% from RM143.1m in 6M17, which was caused by both higher rental income and lower property operating expenses.

High occupancy. Both properties; Mid Valley Megamall and The Gardens Mall are operating with high occupancy rates of close to 100%, driven by its strategic prime location.

Outlook. We expect both of IGB REIT’s assets; Mid Valley Megamall and The Gardens Mall continue to perform well as we believe they are shielded from challenging retail environment in Klang Valley due to its concentrated prime assets with high traffics, sustainable positive tenant sales growths and rental reversions.

Forecast. Maintain as the Results Were Inline.

Maintain BUY, TP: RM1.89. We maintain BUY at TP RM1.89 based on targeted yield of 5.7% which is derived from 2 years historical average yield spread of IGB REIT and 10 year MGS. We like IGB REIT for its concentration of prime retail assets.

Source: Hong Leong Investment Bank Research - 16 Jul 2018