IGB REIT’s 9M18 core net profit of RM228.2m (+5.1% YoY) was within both ours and consensus expectations. Overall, the improvement was driven by positive rental reversion and lower property operating expenses incurred. We maintain our forecast and retain our BUY call with unchanged TP of RM1.89. We continue to favour IGB REIT for its concentrated prime assets, sustainable tenant sales growths and positive rental reversions.

Within expectations. 9M18’s revenue of RM398.5m (+2.0% YoY) translated into a core net profit of RM228.2m (+5.1% YoY). The results were within both ours and consensus expectations, accounting for 72.2% and 73.1%, respectively. We deem it to be in line as we expect better contribution seasonally in 4Q18.

Dividend. Declared 3Q18 DPU of 2.29 sen per unit, going ex on the 7th November 2018. To recap, IGB REIT has changed the frequency of distribution period from half yearly to quarterly since 1Q18.

QoQ/YoY. Revenue for 3Q18 of RM133.7m (+4.5% QoQ; +3.2% YoY) translated to core net profit of RM75.8m (+8.0% QoQ; +2.3% YoY). This boost was mainly due to positive rental reversion. The rise was also contributed by the recent completion of asset enhancement initiatives (AEIs) at the lower ground of The Gardens Mall in September, which added 14k sq ft of NLA. However it was partially offset by utilities and maintenance expenses.

YTD. 9M18 revenue of RM398.5m increased by 2.0% from RM390.6m in corresponding period 9M17. Primarily, the improvement was supported by higher rental income contribution resulting from positive rental reversion. As a result, normalized net profit of RM228.2m showed a 5.1% increment from RM217.2m in 9M17, which caused by both higher rental income as well as lower property operating expenses.

High occupancy. Both properties; Mid Valley Megamall and The Gardens Mall continue to operate with high occupancy rates of close to 100%, thanks to its strategic prime location.

Outlook. We believe both of IGB REIT’s assets; Mid Valley Megamall and The Gardens Mall will continue to perform well, as they are shielded from challenging retail environment in Klang Valley due to its concentrated prime assets with high traffic, sustainable positive tenant sales growth 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 favour IGB REIT for its concentration of prime retail assets.

Source: Hong Leong Investment Bank Research - 25 Oct 2018