Within expectations. 3Q19 core net profit of RM79.8m (+2.4% QoQ, +5.3% YoY) brought the 9M19 sum to RM240.6m (+5.4% YoY). The results were within both ours and consensus expectations, accounting for 73% and 75%, respectively. We deem it to be in line as we expect better contribution seasonally in 4Q19.

Dividend. Declared 3Q19 DPU of 2.31 sen per unit (3Q18: 2.29 sen per unit), going ex on the 6th November 2019.

QoQ. Top-line growth was up by 1% to RM136.3m, leading to core profit of RM79.8m (+2.4%); this was mainly due to higher rental income (+1.8%). Net property income (NPI) increased by 2.2%, thanks to lower operating expenses (-2.3%) attributable to lower utilities expenses (-9.5%).

YoY. Revenue climbed by 1.9% against the corresponding 3Q18, which then led to the increase in core earnings by 5.3%; this was due to higher rental income (+2.2%) in current quarter given positive rental reversion. NPI rose by 4.3%, owing to lower maintenance expenses (-20.7%) and higher interest income (+16.9%).

YTD. 9M19 revenue of RM412.5m increased by 3.5% vs the corresponding period 9M18. The improvement was mainly supported by higher rental income contribution, resulting from positive rental reversion. In turn, net profit of RM240.6m showed a 5.4% increment, which was supported by both higher gross rental income (+3.8%) as well as lower maintenance expenses (-13.4%).

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 defensive from the challenging retail environment in Klang Valley due to its concentrated prime assets with high traffic, sustainable positive tenant sales growth and rental reversions. Not resting on its laurels, IGB REIT is determined to push ahead with its: (i) Asset Enhancement Initiatives, and (ii) bringing on creative activities and exclusive events by working with tenants as well as corporate partners - to raise on-ground promotional activities for shoppers and visitors. Separately, the potential pipeline asset, Mid Valley Southkey Megamall in Johor has started operation in April 2019 in all floors except the 4th level (probable to commence by Nov 2019) thus bringing its occupancy rate to 85% as at 3Q19; the asset is expected to be injected into IGB REIT earliest in 2022.

Forecast. Maintain as the Results Were Inline.

Maintain BUY, TP: RM2.17. We maintain BUY at TP RM2.17 based on targeted yield of 4.9% which is derived from 2-year historical average yield spread between IGB REIT and 10-year MGS yield. We favour IGB REIT for its concentration of prime retail assets with sustainable earnings and DPU.

Source: Hong Leong Investment Bank Research - 24 Oct 2019