IGB REIT started off the year with a solid set of numbers – 1Q19 realised net profit grew by 0.8% yoy to RM82.9m on higher revenue (+3.2%) which more than offset the 10% increase in operating costs (from a low base in 1Q18). An interim DPU of 2.4 sen (-3.2% yoy, +5.3% qoq) was declared for 1Q19. Overall, results were within expectations. We maintain our HOLD call with a higher DDM-derived target price of RM1.90 (from RM1.74) as we lower our discount rate to 7.9% (from 8.2%) and roll forward our valuation. At a 5.1% 2019E yield, -1SD below its 6-year mean, its valuation looks fair considering the solid earnings outlook and strong investor demand for yields.

Strong Revenue Drives Earnings Growth, Results Within Expectations

IGB REIT’s 1Q19 realised net profit grew by 0.8% yoy to RM82.9m on the back of higher revenue (+3.2%) which more than offset a 10.1% increase in operating expenses (from a low base in 1Q18). In tandem, 1Q19 realised EPU grew by a marginal 0.2% yoy to 2.34 sen. The DPU has however slipped by 3.2% yoy to 2.40 sen due to a lower distribution adjustment (lower amount of manager fee payable in units). Overall, the results were within the market and our expectations – 1Q19 earnings made up of 26% of the consensus and our full-year earnings forecasts.

Sequentially, 1Q19 Core Net Profit Grew by a Commendable 9.8%

IGB REIT’s 1Q19 realised net profit grew by 9.8% qoq to RM82.9m on: (i) 2.9% revenue growth on completion of the asset enhancement initiatives; and (ii) a 7.4% qoq decline in operating expenses on the reduction in utilities expenses (-7.0%), maintenance (-14.7%) and other expenses (- 5.5%). The REIT’s 1Q19 NPI margin has improved by 3 ppt qoq to 73.3%.

Reaffirm HOLD With a Higher DDM-derived TP of RM1.90

We raise our DDM-derived TP to RM1.90 (from RM1.74) after: (i) incorporating a lower cost of equity of 7.9% (previously 8.2%) in anticipation of higher investor demand for defensive yield plays; and (ii) rolling forward our valuation horizon. We maintain our HOLD rating. At a 2019E dividend yield of 5.1%, IGB REIT is trading at -1SD below its 6-year average, and looks fair considering its solid earnings outlook and strong investment demand for defensive assets. Upside risks include an unexpected cut in interest rates and further compression in government bond yields; a downside risk is lower-than-expected retail spending.

Source: Affin Hwang Research - 25 Apr 2019