2QFY22 core net profit of RM18.3m (-1.1% QoQ) brought 1HFY22 core net profit to RM36.4m. This was below our full year expectations at 42.8%. The shortfall was mainly due to higher-than-expected opex arising from refurbishment costs and utility expenses. DPS of 1.93 sen was declared in 1HFY22. Average portfolio occupancy increased slightly to 71.3% (1QFY22: 71.0%) while gearing stood at 26%. We reduced our FY22-24 earnings forecast by 22%/18%/13%. Post earnings adjustments, our TP decreased to RM0.59 (from RM0.61), based on FY23 DPU on targeted yield of 6.4%. Maintain Buy.

Below expectations. 2QFY22 core net profit of RM18.3m (-1.1% QoQ) brought 1HFY22 core net profit to RM36.4m. This was below our full year expectations at 42.8%. The shortfall was mainly due to higher-than-expected opex arising from refurbishment costs and utility expenses.

Dividend. Declared DPS of 1.93 sen in 1HFY22 (semiannual dividend).

QoQ. Revenue rose marginally to RM48.3m (+2.5%) due to the slight increase in occupancy rate of Menara IGB & IGB Annexe and Centrepoint North. However, total operating expenses grew to RM18.3m (+9.1%), attributable to the escalation in reimbursement costs and other property expenses (+19.9%). As a result, this led to a slight decline in core net profit to RM18.1m (-2.0%).

YoY/YTD. No comparative figures are available as IGBCR was only recently listed on 20 Sep 2021.

Occupancy and gearing. Average portfolio occupancy increased slightly to 71.3% (1QFY22: 71.0%). Meanwhile, gearing stood at 26%.

Outlook. IGBCR stands to be beneficiary of the ongoing recovery in office space demand (backed by its prime properties in strategic location) as more employees gradually return to office with fewer working from home arrangements. Meanwhile, rental support is expected to trend downwards as business activities recover, underpinned by the lifting of pandemic-related movement restrictions with the transition to endemicity. Despite soft performance in 1HFY22, we expect the Group to regain its recovery momentum moving forward, backed by the aforementioned factors.

Forecast. We reduced our FY22-24 earnings forecast by 22%/18%/13% to account for slower than expected recovery and higher operating expenses on the continued refurbishment activities.

Maintain BUY, TP: RM0.59. Post earnings adjustments, our TP decreased to RM0.59 (from RM0.61). Our TP is based on FY23 DPU on targeted yield of 6.4%. Our targeted yield of 6.4% is derived from ascribing a 150bp narrower spread to the 5-year average yield of pure office REITs in Malaysia. In our opinion, the narrower spread (i.e. 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 Jul 2022