IGB REIT’s 1H19 core net profit of RM160.8m (+5.5% YoY) was within both ours and consensus expectations. Dividend of 2.26 sen per unit was declared. Overall, the increment in 1H was supported by higher rental income received, offset with higher property operating expenses incurred. We retain our forecast and maintain our BUY call with unchanged TP of RM2.15. We continue to like IGB REIT for its concentrated prime assets, sustainable tenant sales growth and rental reversions.

Within expectations. 1H19’s revenue of RM276.2m (+4.4% YoY) translated into a core net profit of RM160.8m (+5.5% YoY). The results were within both ours and consensus expectations, accounting for 49% and 51%, respectively.

Dividend. Declared 2Q19 DPU of 2.26 sen per unit (2Q18: 2.14 sen per unit), going ex on the 6th August 2019.

QoQ. Revenue for 2Q19 of RM135.0m reduced by 4.4% against previous quarter of RM141.2m. This was mainly due to lower rental income received, as oppose to the higher 1Q19 which was mainly due to the Chinese New Year celebration. However, this was slightly mitigated by an increase in other income by 6.2%. Core net profit decreased by 6.0% to RM77.9m from RM82.9m in 1Q19. The decline was driven by lower rental income in the current quarter.

YoY. 2Q19’s revenue increased by 5.5% as compared to RM128.0 in 2Q18. This was primarily caused by higher rental income in the current period backed by positive rental reversion. As a result, core net profit increased by 11.0% mainly due to the higher rental income as well as lower property operating expenses in the current period.

YTD. Revenue for 1H19 of RM276.2m increased by 4.4% from RM264.8m in corresponding period 1H18. Primarily, the increment was contributed by higher rental income resulting from positive rental reversion. Core net profit of RM160.8m showed an increase of 5.5% from RM152.4m in 1H18, which caused by higher rental income but offset by higher property operating expenses coming from higher utilities expenses due to higher consumption.

Outlook. We expect both assets will continue to perform well, as they are shielded from 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%. In The Gardens Mall, upgrade works in South Court has been completed in 2Q19 and currently upgrade works on escalators at Centre Court (started June 2019) is ongoing and expected to complete by end of 3Q19. The pipeline asset, Mid Valley Southkey Megamall in Johor (started operation in April 2019) has achieved a high occupancy rate of 85% as at 2Q19. The asset is expected to be injected into IGB REIT earliest in 2022.

Forecast. Maintain as the Results Were Inline.

Maintain BUY, TP: RM2.15. We maintain BUY at TP RM2.15 based on targeted yield of 4.9% which is derived from 1SD below 2-year historical average yield spread between IGB REIT and 10-year MGS yield in view of it being a major prime retail REIT. We continue to like IGB REIT for its concentration of prime retail assets.

Source: Hong Leong Investment Bank Research - 24 Jul 2019