IGB REIT’s 1QFY21 core net profit of RM43.7m (39.4% QoQ, -36.0% YoY) was below ours and consensus expectations; the negative deviation was due to lower than expected revenue generated. Dividend of 1.33 sen per unit was declared. The overall decline in 1Q21 was mainly due to rental support provided to tenants and lower car park income arising from the reinforcement of MCO2.0 since 13 Jan. We cut our FY21 earnings by 5% to reflect in lower rental and car park income due to MCO during the quarter. We also introduce FY23 estimates. Maintain BUY with unchanged TP of RM1.91, based on targeted yield 4.5% on FY22 DPU. We like IGB REIT for its prime asset location and reliant on domestic footfall, which we believe would experience a quicker recovery post MCO.

Below expectations. 1QFY21 core net profit of RM43.7m (-39.4% QoQ, -36.0% YoY) was below ours and consensus estimates, accounting for 17% and 15%, respectively; the negative deviation was due to lower-than-expected top line as a result of MCO2.0.

Dividend. Declared 1Q21 DPU of 1.33 sen per unit, going ex on 10 May 2021 (1Q20: 1.94 sen).

QoQ. Revenue fell by 32.6% to RM99.4m, bringing down net property income (NPI) to RM62.4m (-33%); this was mainly due to rental support provided to tenants as well as lower car park income which resulted from MCO reinforcement (13 Jan – 4 Mar). Borrowings costs remained flattish (-2.2%). Overall, core net profit dropped by 39.4% to RM43.7m.

YoY. Top line decreased (-20.5%) on the back of lower rental income (-21%) and other income (-19.3%) caused by rental support provided to tenants along with lower car park income in both properties. Back in 1QFY20, revenue was not heavily impacted as MCO1.0 started only in March. NPI followed the decline (-29.4%) given higher other expenses (+51.3%), no thanks to Covid-19 related costs (like thermal scanners, PPEs, sanitization and cleaning), while total operating expenses remained marginally unchanged (+1.2%). As a result, core net profit fell by 36%.

High occupancy. Both properties; Midvalley Megamall and The Gardens Mall’s occupancy remains comfortably high, at more than 90%, thanks to its strategic location.

Outlook. As we understand, IGB REIT will still be providing rental assistance to its tenants that require support on a case-to-case basis. We believe IGB REIT’s low exposure to tourist (less than 10% exposure to international tourists) and its prominent location will aid in speeding up the recovery from Covid-19 pandemic impact.

Forecast. We updated our model for FY20 audited accounts, introduce FY23 forecasts, and cut our FY21 earnings by 5% to account for lower rental and car park income arising from the profound negative repercussion of MCO (since 13 Jan). However, we keep FY22 estimates unchanged.

Maintain BUY, TP: RM1.91. Maintain BUY with unchanged TP of RM1.91. Our TP is based on FY22 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. We favour IGB REIT for its prime asset location and reliant on domestic footfall, which we believe would experience a quicker recovery post MCO.

Source: Hong Leong Investment Bank Research - 27 Apr 2021