IGBREIT’s 3Q17 and 9M17 realised net profit of RM83.1m (+21% yoy) and RM226.2m (+9% yoy) was broadly within expectations. Growth was mainly due to lower borrowing costs during the quarter. However, as rental income continues to track behind our expectations, we are lowering our rental forecast by 2.1%, leading to a lower TP of RM1.66. Despite our slightly lower TP, we are still maintaining our HOLD call.

9-10% Rental Revision Is Still Possible for the Next Few Years

The gross rental revenue for 9MFY17 at RM390m is lagging behind our previous forecast, forcing us to revaluate our rental revision assumption. Despite lowering our gross revenue growth assumption for the year to 4.9% from 7.1% previously, as we lower our rental revision assumption to 8%, we believe Mid Valley City is still delivering a good value proposition to its tenants, as the occupancy rate remains close to 100%. Hence we are confident that IGBREIT can still achieve a rental revision of 9-10% for the next few years, as the improving economic outlook might help to spur consumer spending.

Lower Finance Cost Was Just An Accounting Adjustment

Despite revenue falling below our expectations, the NPI margin for IGBREIT is within our expectation. The biggest surprise to us for the quarter was the lower-than-expected finance cost, due to the write-back of step-up interest arising from the fixed-rate term loan, which was fully settled during the quarter. The lower finance cost was mainly an accounting adjustment. The loan repayment was financed by new issuance of a AAA-rated MTN, which bears a similar interest cost.

Maintain HOLD on Valuation; TP Revised to RM1.66 From RM1.68

We are revising down our 2017-19E realised net profit by 0.3%/3.5%/3.5%, as we lower our revenue forecast by 2.0-2.2%. Reiterate HOLD on IGB REIT with our DDM based 12-month TP revised from RM1.68 to RM1.66 (based on a cost of equity of 8.2%, risk-free-rate of 4% and growth rate of 3%). We prefer YTL Hospitality REIT (YTLREIT MK, RM1.20, BUY, TP: RM1.55) for exposure to the M-REITs sector.

Source: Affin Hwang Research - 9 Nov 2017