IGB REIT’s 1QFY22 core net profit of RM85.4m (+16.0% QoQ, +95.3% YoY) was above both ours and consensus full year estimates; positive deviation was due to higher-than-expected revenue achieved. Dividend of 2.51 sen per unit was declared. The overall improvement in 1Q22 was mainly due to higher revenue generated thanks to lower rental support provided to tenants and higher car park income arising from the reopening of economy, relaxation of containment measures as well as Chinese New Year festivities. We updated our model for FY21 audited accounts, introduce FY24 forecasts and increase FY22-23 earnings by 10%-11% as we factor in lesser rental support going forward. Post earnings adjustments, and after rolling forward of valuation year, our TP increased to RM1.95 (from RM1.75), based on FY23 DPU on targeted yield 5.2%. Maintain BUY. We favour IGB REIT for its prime asset location with high occupancy and reliant on domestic footfall.

Above expectations. 1QFY22 core net profit of RM85.4m (+16.0% QoQ, +95.3% YoY) was above ours and consensus full year estimates, accounting for 32% and 30%, respectively. The positive deviation was due to higher-than-expected top line thanks to gradual recovery in footfall and vehicle traffic volume.

Dividend. Declared 1Q22 DPU of 2.51 sen per unit, going ex on 13 May 2022 (1Q21: 1.33 sen).

QoQ. Revenue was up +12.1% to RM133.8m mainly driven by higher rental income (+18.7%; on lesser rental support given) which rose from the economic reopening and improved tenant retail sales as well as Chinese New Year celebration. In turn, net property income (NPI) mirrored top-line improvement (+15.0%). This along with lower borrowing costs (-3.2%) further lifted core net profit to RM85.4m (+16.0%).

YoY. Top line improved (+34.6%) on the back of higher rental income (+44.9%) and other income (+10.2%) aided by lower rental support provided, thanks to the recovery seen in footfall and vehicle traffic volume which stemmed from economic reopening and relaxation of containment measures. This, together with lower operating expenses (-29.6%, thanks to lower reimbursement costs) helped to lift up NPI by +72.7%. As a result, core net profit improved by +95.3%.

Occupancy and gearing. Both properties, Midvalley Megamall and The Gardens Mall’s occupancy remains stable, at >99%. Gearing stood at 23%.

Outlook. We remain confident on IGB REIT’s recovery, with high portfolio occupancy as well as being backed by the malls’ large exposure to domestic shoppers (>90%), and its prominent location.

Forecast. We updated our model for FY21 audited accounts, introduce FY24 forecasts, and increase FY22-23 earnings by 10%-11% as we factor in higher rental income going forward, with the expectation of lower rental support.

Maintain BUY, TP: RM1.95. Post earnings adjustments, and after rolling forward of valuation year, our TP increased to RM1.95 (from RM1.75). Our TP is based on FY23 DPU on targeted yield of 5.2% 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 (>90%), which we believe would experience a quicker recovery among other retail REITs (unlike Pavilion and Suria KLCC, which had a higher exposure to international tourists).

Source: Hong Leong Investment Bank Research - 28 Apr 2022