IGB REIT’s 9MFY21 core net profit of RM126.6m (-23.2% YoY) was below ours and consensus expectations; the negative deviation was due to higher-than-expected rental assistance provided. Dividend of 1.18 sen per unit was declared. YTD, earnings was affected due to lower rental income from higher rental support provided to affected tenants during MCOs and Phase 1 NRP. We remain hopeful for a strong 4Q backed by recovery stemming from Phase 2 NRP and festivities. We cut our FY21-23 earnings by 19%/3%/1% to reflect in slower than expected recovery. Post adjustments, our TP fell to RM1.84 (from RM1.88), based on targeted yield 4.5% on FY22 DPU. Maintain Buy.

Below expectations. 3QFY21 core net profit of RM38.5m (-13.0% QoQ, -49.9% YoY) brought 9MFY21 core net profit to RM126.6m (-23.2% YoY). The results were below ours and consensus expectations, accounting for 56% and 58%, respectively. The shortfall was due to the higher-than-expected rental assistance provided given slower than expected recovery.

Dividend. Declared 3Q DPU of 1.18 sen per unit, going ex on 9 Nov 2021 (3Q20: 2.11 sen).

QoQ. Top line improved (+12.8%) to RM95.8m mainly due higher rental income (+25.4%). Despite the higher revenue, other expenses increased (+>300%) due to higher reimbursement costs (+>400%) which led the fall in net property income (NPI) (- 11.4%). Borrowings costs remained flattish (+1.1%). Hence core net profit of RM38.5m was attained (-13.0%).

YoY. Fall in revenue (-26.7%) was driven by lower gross rental income (-25.6%) and other income (-29.7%). Higher rental support was provided to tenants during Phase 1 of NRP as oppose to SPLY where the nation was on RMCO period. Other expenses increased (+106.5%) due to higher allowance for impairment of trade receivables resulted by Phase 1 of NRP. In turn, NPI income reduced (-42.8%) followed by the decrease in core net profit (-49.9%).

YTD. Revenue for 9MFY21 of RM280.2m fell (-11.8%) due to lower rental income (- 9.5%) resulting from higher rental support to their tenants and lower car park income during MCOs and Phase 1 NRP. Other expenses was higher (+44.7%) for the same reason mentioned above, which steered the decline in NPI (-18.8%). Subsequently, core net profit of RM126.6m (-23.2%) was achieved.

High occupancy. Both properties; Midvalley Megamall and The Gardens Mall’s occupancy remains stable, at >90%.

Outlook. While recovery seems slower than expected, we remain confident on IGB REIT retrieval being backed by malls’ large exposure to domestic shoppers (>90%), and its prominent location. We are hopeful for a stronger 4Q encouraged by smother recovery with Phase 2 of NRP paired with festivities season.

Forecast. We cut our FY21-23 earnings forecast by 19%/3%/1% to account for slower than expected recovery, with an expected prolonged rental assistance.

Maintain BUY, TP: RM1.84. Post adjustments, or TP decrease to RM1.84 (from RM1.88). To note, 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 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 (unlike Pavilion and Suria KLCC, which has a higher exposure to international tourists).

Source: Hong Leong Investment Bank Research - 27 Oct 2021