Top Performing Assets, Solid DPU Growth

IGBREIT reported a solid set of results – 2017 realised net profit grew by 9% on higher revenue (+3.5%), stable margin and lower interest expenses. 2017 DPU came in 6.5% higher yoy at 9.28 sen (5.8% yield). The results are broadly within market and our expectations. Maintain HOLD. IGBREIT is our preferred pick among the retail-centric MREITs but the weak retail mall market and possible rate hike(s) may weigh on investor sentiment.

2017 Realised Net Profit Grew by 9%, DPU Increased by 6.5%

IGBREIT reported a strong set of results - 2017 realised net profit grew by 9% to RM303m on higher revenue (+3.5% yoy), stable NPI margin (71%) and lower interest expenses (arising from refinancing of term loan by AAArated MTN). IGBREIT’s 4.6% gross rental income growth is commendable, given the challenging retail mall market conditions. Overall, the results were within market and our expectations. IGBREIT declared a second income distribution of 4.90 sen (4Q16: 4.30 sen), bringing the full year distribution to 9.28 sen (2016: 8.71 sen)

Interest Expenses Normalized and 4Q17 Realised Profit Fell by 7% Qoq

IGBREIT’s 4Q17 realised net profit grew by 9.7% yoy to RM77m on higher revenue and lower interest expenses. Sequentially, its 4Q17 realised profit was 7% weaker qoq due to write-back of interest expenses in 3Q17.

Maintain HOLD With An Unchanged TP of RM1.63

We tweaked our FY18-19E EPS by 0-1% after incorporating IGBREIT’s actual FY17 results. Maintain HOLD rating and price target of RM1.63. IGBREIT is our preferred pick among the retail-centric MREITs - we like its first-class assets, strong balance sheet and exciting asset acquisition outlook. However, the weak retail mall market and possible rate hike(s) may weigh on investor sentiment. At 5.6% 2018E DPU yield, valuation is within historical trading range and looks fair. Key re-rating catalyst is the opening of Southkey Megamall (a JV project between IGB Corp and a Johorbased company) on 8th August 2018.

Key Risks, Sensitivity Analysis

Upside risk: a change in market expectations from rising rates to a rate cut; downside risk is further deterioration in retail mall market. We estimate that every 25-bps increase in cost of equity (from 8.2%) to lower our fair value by 4% while every 50-bps change in our long-term growth assumption (3%) to increase / decrease our fair value by 7%.

Source: Affin Hwang Research - 24 Jan 2018