IGB REIT’s 1Q19 core net profit of RM82.9m (+9.8% QoQ, +0.8% YoY) was slightly below ours but within consensus expectations. The deviation was due to lower-than-expected revenue contribution in what is usually a seasonally high first quarter. Dividend of 2.45 sen per unit was declared. Overall boost in 1Q19 was mainly driven by (i) increase in rental income thanks to higher rental reversion; and (ii) lower property operating expenses. We adjust our earnings slightly and performed some model up keeping, which resulted in our FY19-21 EPU revising downwards by -4% to -12%. We maintain our BUY call with lower TP of RM1.97 (from RM2.05). We continue to like IGB REIT for its concentrated prime assets.

Slightly below expectations. 1Q19 total revenue of RM141.2m (+2.9% QoQ, +3.2% YoY) translated into a core net profit of RM82.9m (+9.8% QoQ, +0.8% YoY). The results were slightly below ours but in line with consensus expectations, accounting for 24.0% and 25.7%, respectively. The deviation was due to lower-than-expected revenue contribution in what is usually a seasonally high first quarter. Trend wise, IGB REIT typically achieves higher 1Q earnings results (c.26%-27%) due to seasonality (i.e. Chinese New Year and Valentine’s Day celebration). Hence we also expect lower net profit in the subsequent 2 quarters.

Dividend. Declared 1Q19 DPU of 2.40 sen per unit, going ex on the 7th May 2019 (1Q18: 2.48 sen).

QoQ. Total revenue for 1Q19 of RM141.2m increased by 2.9% against previous quarter of RM137.2m. Core net profit also increases by 9.8% to RM82.9m from RM75.5m in 4Q18. The increment was due to higher rental income and lower property operating expenses.

YoY. Total revenue for 1Q19 increased by 3.2% compared to RM136.8 in 1Q18. This was mainly due the increase in both rental income (+3.5%) and higher other income (+2.0%). Likewise, core net profit too increased by 0.8%, and this was essentially due to the higher rental income as a result of improved rental rates and also the lower property operating expenses.

Stable 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 assets will continue to perform well, as they are resilient to the challenging retail environment in Klang Valley thanks to its prominent location which contributed to strong footfall traffic into the malls, hence preserving rental and high occupancy rate of close to 100%. Also, some major AEIs along with tenant renovations are set to take place that will continue to excite the market.

Forecast. We adjust our earnings slightly and performed some model up keeping. As a result, FY19-21 EPU are revised by -4%, -7% and -12% respectively.

Maintain BUY, TP: RM1.97. We maintain BUY with lower TP RM1.97 (from RM2.05) based on targeted yield of 5.3% 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 with sustainable earnings and DPU, apart from attractive dividend yield which is expect to sustain at 5.6%-5.7% over the next 3 years.

Source: Hong Leong Investment Bank Research - 25 Apr 2019