IGB REIT’s 3Q20 core net profits of RM76.8m (+294.1% QoQ, -3.7% YoY) were within ours and consensus expectations. Dividend of 2.11 sen per unit was declared. Overall, the company has shown a strong recovery in 3Q thanks to its robust asset quality and premium location. We believe IGBREIT’s low exposure to tourist (less than 10% exposure to international tourists) and its establishment are the reasons for their strong recovery in 3Q. Maintain our forecast and reiterate our BUY call with unchanged TP of RM 2.01.

Within expectations. 3Q20 core net profit of RM76.8m (+294.1% QoQ, -3.7% YoY) brought 9M20 core net profit to RM164.7m (-31.5% YoY). The results were within ours and consensus expectations, accounting for 78% and 75%, respectively.

Dividend. Declared 3Q20 DPU of 2.11 sen per unit (3Q19: 2.31 sen per unit), going ex on the 9 th November 2020.

QoQ. Top-line recovered remarkably by 111.0% to RM130.7m due to low base in 2Q20 from rental support provided to tenants and lower car park income arising from the Covid-19 pandemic and resultant MCO. Although total operating expenses was higher by 33.7% (due to cost saving in 2Q as the malls are not fully operational), core net profit increased by 294.1% to RM76.8m due to the lower base.

YoY. Revenue decreased slightly by 4.1% against the corresponding 3Q19 due to rental support provided to tenants and lower car park income. In turn, core net profit decreased by 3.7% in tandem with lower revenue.

YTD. Revenue for 9M20 of RM317.7m decreased by 23.0% from RM412.5m in corresponding period 9M19. Primarily, the fall was contributed by lower rental income resulting from rental support to their tenants and lower car park income during MCO particularly during 2Q. Subsequently, core net profit of RM87.9m showed a decrease of 31.5% from RM164.7m in 9M19.

Outlook. We believe IGBREIT’s low exposure to tourist (less than 10% exposure to international tourists) and its establishment as well as its prominent location are the reasons for their strong recovery in 3Q. Although the recent resurgence of Covid-19 cases is concerning, we reckon that the company will still be on track to recover thanks to their premium location. Also, it’s worth to note that its 3Q20’s net profit showed an improvement by 12.4% compared to 1Q20 (and only a decrease of 3.7% as compared to 3Q19); which suggest that company almost back to pre-Covid levels. Management guided that the rental assistance will be extended to 4Q (which we already priced in and imputed in our FY20 earnings) on a case-to-case basis to struggling tenants at a lesser quantum and won’t be as drastic compared to the first MCO.

Forecast. Maintain as Results Were Inline.

Maintain BUY, TP: RM2.01. We maintain BUY with unchanged TP of RM2.01 pegged on FY21f DPU on targeted yield of 4.5%, which is derived from 2-year historical average yield spread between IGB REIT and 10-year MGS yield. IGBREIT’s malls will be one of the few malls that can recover quickly due to its robust asset quality and low exposure to tourist (unlike Pavilion and Suria KLCC, which has a higher exposure to international tourists).

Source: Hong Leong Investment Bank Research - 27 Oct 2020