IGBREIT reported a modest set of results - 6M18 realised net profit grew by 7% to RM152m on lower cost (-7%) and higher revenue (+1%), broadly within market and our expectations. Maintain HOLD with an unchanged DDM-derived price target of RM1.63. While we like IGBREIT for its first-class assets, strong management and solid balance sheet, the competition in the retail mall market (e-commerce, new retail malls) and possible rate hike(s) may weigh on investor sentiment.

6M18 Realised Net Profit Grew by 7% Yoy, Within Expectations

IGBREIT reported a modest set of results – 6M18 realised net profit grew by 6.5% to RM152.4m on lower operating expenses (-7.0% yoy) and higher revenue (+1.4% yoy). We have observed reductions in various expenses including utilities (-7% yoy), reimbursement costs (-7% yoy) and other expenses / building upgrades (-31% yoy). Overall, the results are broadly within market and our expectations – 6M18 realised net profit accounted for 49-51% of street and our full year forecasts. IGBREIT has declared a 2nd interim distribution of 2.14 sen, translating to a 6M18 payout of 4.62 sen (+5.5% yoy).

Sequentially, NPI Margin Has Normalised From Its Record in 1Q18

Sequentially, IGBREIT’s 2Q18 realised net profit fell by 15% to RM70.2m, from its record high of RM82.3m in 1Q18. The lower profit was due to a decline in revenue (-6.4% qoq) from a seasonally stronger 1Q and an increase in operating expenses (+8.6% qoq). Overall, the group’s NPI margin has normalised from a record high of 74.9% in 1Q18 to 70.9%, within its historical NPI margin range.

Maintain HOLD With a DDM-derived TP of RM1.63

We maintain our earnings forecasts, HOLD rating and DDM-derived price target of RM1.63. Management is doing a commendable job in controlling its expenses. However, the soft retail mall market (IGBREIT’s revenue grew by a mere 1.4% in 6M18) and rising cost pressure (utilities costs, minimal wages, maintenance and upgrades) may cap its near-term earnings growth. At 5.6% 2019E yield, valuation is within historical trading range (5-year average of 5.9%), looks fair.

Key Risks

Upside risks are higher-than-expected retail spending, further costs savings; downside risks include hike(s) in interest rate and cost escalation.

Source: Affin Hwang Research - 16 Jul 2018