IGB Commercial REIT’s 1Q22 core net profit of RM18.3m was below our full year estimates. The negative deviation was due to higher-than-expected expenses on upgrading of works in some buildings. No dividends were declared. QoQ revenue improved (+2.0%), thanks to better rental rates. However, higher operating expenses (+15.5%) were seen due to upkeep and upgrading of works in some buildings. Thus, core net profit fell slightly to RM18.3m (-2.0%). We updated our model for FY21 audited accounts, introduce FY24 forecasts and reduce our FY22- 23 earnings by 11%-6% to factor in higher operating expenses. Post earnings adjustments, and after rolling forward of valuation year, our TP fell to RM0.69 (from RM0.79), based on FY23 DPU on targeted yield of 6.0%. Maintain BUY.

Below expectations. 1Q22 core net profit of RM18.3m (-2.0% QoQ) was below our full year expectations at 18%. The negative deviation was due to higher-than-expected expenses on upgrading of works in some buildings.

Dividend. No dividends were declared as payout is done semi-annually.

QoQ. Revenue of RM47.2m saw improvement (+2.0%) thanks to higher gross rental income (+2.9%) and other income (+0.3%). That said, total operating expenses increased (+15.5%) mainly due to higher other expenses (+82.2%) on upkeep and upgrading of work in some buildings. This led to a lower net property income (NPI) of RM30.4m (-4.2%). The slight reduction in manager fee (-3.6%), trustee fee (-2.6%), and other trust expenses (-68.3%) slightly mitigated the fall in core net profit to RM18.3m (- 2.0%).

YoY. No comparative figures are available as IGB Commercial REIT was only recently listed (20 Sep 2021).

Occupancy and gearing. Average portfolio occupancy fell slightly to 70.6% (FY21: 71.6%). Meanwhile gearing stood at 26%.

Outlook. IGB Commercial REIT will continue its efforts on maintaining the physical conditions of the portfolio including assurance of indoor air quality while embarking on intense marketing, supported by attractive, flexible rental packages to boost occupancies. Following the economic recovery, we foresee rental support to remain minimal. Moreover, with the gradual improvement in business sentiment and trade, we foresee demand for office spaces will rise and stabilise occupancy and rental rates.

Forecast. We updated our model for FY21 audited accounts, introduce FY24 forecasts, and reduce FY22-23 earnings by 11%-6% as we factor in higher operating expenses on expectation of on-going upkeep and upgrading of works on their properties.

Maintain BUY, TP: RM0.69. Post earnings adjustments, and after rolling forward of valuation year, our TP decreased to RM0.69 (from RM0.79). Our TP is based on FY23 DPU on targeted yield of 6.0%. Our targeted yield of 6.0% is derived from ascribing a 150bp premium to the targeted yield of 5-year historical average yield spread of pure office REITs in Malaysia (consisting of Sentral REIT & UOA REIT). In our opinion, the premium is fair considering that IGB Commercial REIT’s properties are more strategically located vs peers, and it is the largest standalone office REIT, with market value asset of RM3.2bn.

Source: Hong Leong Investment Bank Research - 28 Apr 2022