IGB REIT’s FY18 core net profit of RM303.8m (+3.2% YoY) was within both ours and consensus expectations. Dividend of 2.28 sen per unit was declared. The overall improvement was supported by positive rental reversion and lower property operating expenses incurred. We maintain our forecast, BUY call and TP of RM1.91. We continue to favour IGB REIT for its concentrated prime assets, sustainable tenant sales growths and positive rental reversions.

Within expectations. FY18’s revenue of RM535.7m (+2.1% YoY) translated into a core net profit of RM303.8m (+3.2% YoY). The results were within both ours and consensus expectations, accounting for 97% and 98%, respectively.

Dividend. Declared 4Q18 DPU of 2.28 sen per unit, going ex on the 7th Feb 2019. This brings FY18 DPU to 9.19 sen (FY17: 9.28 sen). To recap, IGB REIT has changed the frequency of distribution period from half-yearly to quarterly since 1Q18.

QoQ/YoY. Revenue for 4Q18 of RM137.2m (+2.6% QoQ; +2.1% YoY) translated to core net profit of RM75.5m (-0.4% QoQ; -2.1% YoY). The boost in revenue was mainly due to positive rental reversion thanks to the deals and festive season in 4Q18. The rise was also contributed by the recent completion of asset enhancement initiatives (AEIs) in; (i) The Gardens Mall in Sept, which added 14k sq ft of net lettable area (NLA) and in (ii) Mid Valley Megamall in Dec, which added c.<10k sq ft of NLA . However it was partially brought down by higher operating expenses and financing cost.

FY18. Revenue of RM535.7m improved by 2.1% (FY17: RM524.9m). Likewise, core net profit of RM303.8m showed a 3.2% increment (FY17: RM294.3m). Primarily, the increment was driven by higher rental income contribution resulting from positive rental reversion, additional NLA, as well as lower property operating expenses. However, the lift was partially offset by the increase in financing cost.

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: RM1.91. We maintain BUY at TP RM1.91 based on targeted yield of 5.6% 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 - 24 Jan 2019