IGBCR’s 3QFY22 core net profit of RM13.4m (-26.2% QoQ) brought 9MFY22’s sum to RM49.7m. The performance came in below our expectations at 63.4%. The shortfall was due to lower-than-expected average rental rate and continued rising property operating expenses. Average portfolio occupancy rate increased to 74.9% (2QFY22: 71.4%) while gearing stood at 26%. We expect office supply to continue to outstrip demand, resulting from the influx of office supplies that are poised to come on stream. We cut our earnings forecast by 7-12%. Post earnings adjustment, our TP decreased to RM0.46 (RM0.52). Maintain HOLD.

Missing estimates. 3QFY22 core net profit of RM13.4m (-26.2% QoQ) brought 9MFY22 core net profit to RM49.7m. The performance came in below our full year estimates at 63.4%. The shortfall was attributed to lower-than-expected average rental rate and continued rising property operating expenses.

Dividend. None declared, usually in 2Q and 4Q. (YTD: 1.93 sen)

QoQ. Revenue dropped to RM45.5m (-5.9%) due to lower average rental rate of its properties (3Q22: RM6.17 vs 2Q22: RM6.30 per sq ft) but partially mitigated by higher blended occupancy rate. Meanwhile, we also saw property opex up +7.6% due to increase in utilities expenses (+6.4%), maintenance expenses (+11.8%) and reimbursement costs and other opex (+12.7%), which in turn led to a decline in NPI (-14.1%). With rising finance costs (+9.9%), core net profit shrunk -26.2%.

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

Occupancy and gearing. Average portfolio occupancy increased to 74.9% (2QFY22: 71.4%). Meanwhile, gearing stood at 26%.

Outlook. The demand for office space is gradually recovering in tandem with the transition towards endemicity. Nonetheless, we expect office supply to continue to outstrip demand, resulting from the influx of office supplies that are poised to come on stream in the coming quarters. Hence, we anticipate occupancy and rental growth rates for offices to remain muted in the near term. However, its strategically located office properties may help cushion some downward impact arising from the taxing environment.

Forecast. We cut our FY22-24 earnings forecast by 7-12% to reflect lower rental rates and higher operating expenses assumptions.

Maintain HOLD, TP: RM0.46. Post earnings adjustments, our TP decreased to RM0.46 (from RM0.52). Our TP is based on FY23 DPU on targeted yield of 7.4%. Our targeted yield of 7.4% 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 - 4 Nov 2022