IGB REIT’s 2QFY21 core net profit of RM44.3m (+1.4% QoQ, +127.3% YoY) was below ours and consensus expectations; the negative deviation was due to lower than expected revenue generated. Dividend of 1.35 sen per unit was declared. This quarter was affected mainly due higher rental support provided due to FMCO (P1). YTD, revenue and core net profit remained flattish. We cut our FY21 earnings by 6% to reflect lower rental and car park income due to expectation of prolonged rental assistance. Maintain BUY with unchanged TP of RM1.88, based on targeted yield 4.5% on FY22 DPU. We continue to like IGB REIT for its prime asset location and reliant on domestic footfall, which we believe would see a quicker recovery among other retail REITs.

Below expectations. 2QFY21 core net profit of RM44.3m (+1.4% QoQ, +127.3% YoY) brought 1HFY21 core net profit to RM88.0m (+0.2% YoY). The results were below ours and consensus expectations, accounting for 36% and 31%, respectively. While a weak 2QFY21 results was expected, this was still below estimates due to the lower-thanexpected rental income due to higher rental assistance provided during the quarter.

Dividend. Declared 2Q DPU of 1.35 Sen Per/unit, Going Ex on 6 Aug(2Q20: 0.62 Sen).

QoQ. Revenue fell (-14.6%) to RM84.9m, mainly due to the drop in gross rental income (-18.9%) given higher rental support provided to certain tenants which resulted from FMCO (Phase 1). Despite the shortfall, net property income (NPI) remained flat (+1.2%), thanks to lower operating expenses (-41.2%) that was driven by lower maintenance expenses (-11.2%) and lower other expenses (-73.8%). Borrowings costs remained flattish (+1.1%). Overall, core net profit followed through and was also relatively unchanged at RM44.3m (+1.4%).

YoY. Top line improved (+37.0%), backed by both gross rental income (+64.3%) and other income (+2.7%) due to low base effect. This was due to lower rental support provided to tenants vs. SPLY. Higher rental support was given in 2020, especially during mid-March to early May. Lower operating expenses (-11.5%) from the drop property maintenance expense, help to lift up NPI (+69.0%). Also, higher interest income (+20.2%) as well as low base effect resulted to higher core net profit (+127.3%).

YTD. Revenue for 1HFY21 of RM184.4m was sustained (-1.4%) despite lower car park income due to FMCO (Phase 1). Lower operating expenses (-3.9%) was merely thanks to lower utilities expenses. Borrowing costs remained flattish (-0.5%) and this cascaded down to core net profit of RM88.0m (+0.2%).

High occupancy. Both properties; Midvalley Megamall and The Gardens Mall’s occupancy remains high, at >90%, despite MCO/NRP benefited to its strategic location.

Outlook. IGB REIT would continue to provide rental assistance to affected tenants on a case-to-case basis, however we feel the quantum would eventually decrease as we take some cues from the NRP whereby Phase 3 (estimated Sep-Oct) will be seeing a reopening recovery for malls, which possibly allows dine ins and leisure shopping. We believe with IGB REIT’s low exposure to tourist (<10% exposure to international tourists) and its prominent location will aid in speeding up the recovery from Covid-19.

Forecast. We cut our FY21 earnings forecast by 6% to account for slower than expected recovery in 2021, due to expected prolonged rental assistance. We leave our FY22 and FY23 earnings forecast unchanged as we expect a smoother recovery once the country progress up the NRP’s phases.

Maintain BUY, TP: RM1.88. Maintain BUY with unchanged TP of RM1.88, 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 continue to favour IGB REIT for its prime asset location and reliant on domestic footfall, which we believe would experience a quicker recovery among other retail REITs.

Source: Hong Leong Investment Bank Research - 27 Jul 2021