IGBCR’s 4Q22 core net profit of RM13.3m (-0.3% QoQ) brought FY22’s sum to RM63.1m. The performance came in below our expectations at 90%. The shortfall was due to lower-than-expected rental income and continued rising property operating expenses. Average portfolio occupancy rate increased to 77.5% (2QFY22: 71.3%) while gearing stood at 26%. We anticipate its rental income should slowly improve as the recovering occupancy rate should provide respite to overall performance. Despite no changes to our forecasts with TP maintained at RM0.46, we downgrade IGBCR to SELL as its share price has risen 10% since late-Nov.

Below expectations. 4QFY22 core net profit of RM13.3m (-0.3% QoQ, -28.7% YoY) brought FY22 core net profit to RM66.5m (SPLY comparison unavailable as FY21 was only a 16-week reporting period as it was only listed in Sep-21). The performance came in below our full year estimates at 90% due to lower than expected rental income and higher property opex.

Dividend. Declared 4Q22 DPU of 1.5 sen, bringing FY22 sum to 3.4 sen.

QoQ. Revenue rose (+8.7%) due to improving occupancy rate of its properties, albeit partially mitigated by lower portfolio rental rate (RM6.18 psf vs 3Q22: RM6.21 psf). Meanwhile, we also saw property opex up +12.9% due to increase in maintenance expenses (+20.0%) and reimbursement costs and other opex (+33.9%). Overall, NPI increased 5.5%. Coupled with rising finance costs (+16.1%), core net profit stayed flattish (-0.3%).

YoY. Revenue remained muted (-1.3%) while property opex grew 52.9%. As a result, NPI declined 14.1%. Further dragged by increased finance costs (+29.0%), core bottom line fell 28.7%.

YTD. No comparative figures are available as IGBCR was only listed in Sep-21.

Occupancy and gearing. Average portfolio occupancy increased to 77.5% (2QFY22: 71.3%). Meanwhile, gearing stood at 26%.

Outlook. IGBCR isn’t spared from challenges arising from the persistent oversupply woes in the office market. Despite the demand for office space is recovering as the economy has fully reopened, we believe the office supply will continue outstripping demand in 2023 in view of the completion of several new office buildings in Klang Valley. However, we anticipate IGBCR’s rental income should gradually improve as its recovering occupancy rate should provide respite to overall performance. Also, its strategically located office properties may help cushion downside risks.

Forecast. Despite IGBCR missing our FY22 forecasts, taking cue from their up trending portfolio occupancy rate (77.5% vs 2Q22: 71.3%) as well as the strong renewal rates (standing above 80%) for its expiring NLA in 2022, we believe that IGBCR’s bottom line should improve in tandem with the increased contributions from its new tenants as well as normalisation in property opex.

Downgrade to SELL, TP: RM0.46. Despite no changes to our forecasts with TP maintained at RM0.46, we downgrade IGBCR to SELL as its share price has risen 10.5% since late-Nov. This has widened the gap to our TP which has factored in the recovery prospects. Our TP is based on FY23 DPU on targeted yield of 7.4% which 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 IGBCR’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 - 20 Jan 2023