IGB REIT reported a good set of numbers – 6M19 realised net profit grew by 5.5% yoy to RM160.8m on higher revenue (+4.3% yoy). However, 6M19 distributable income grew by a lesser 1.5% yoy due to lower amount of management fees payable in units. Overall, the results were within market and our expectations. We maintain our HOLD rating with an unchanged DDM-derived target price of RM1.90. At a 5.0% 2020E yield, -1.5SD below its 6-year mean, its valuation looks fair considering the solid earnings outlook, first-class assets and strong investor demand for yields.

Higher 6M19 Profit on Revenue Growth, Within Expectations

IGB REIT’s 6M19 realised net profit grew by 5.5% yoy to RM160.8m on the back of higher revenue (+4.3% yoy) and respectable NPI margin of 73.1% (+0.1 ppt). However, the REIT’s 6M19 distributable income grew by a lesser 1.5% yoy due to a lower amount of management fees payable in units. This resulted in a relatively muted 6M19 DPU growth of 0.9% (to 4.66 sen). Overall, the results were within the market and our expectations – 6M19 realised net profit made up of 51% of the consensus and our full-year earnings forecasts.

2Q Is Seasonally Weaker

IGB REIT’s 2Q19 realised net profit fell by 6.0% qoq to RM77.9m due to lower revenue (-4.4% qoq). We observe that Q2 is typically a weaker quarter compared to Q1. While weaker qoq, we note that 2Q19’s realised net profit of RM77.9m is markedly above (+11%) the RM70.2m recorded in 2Q18, driven by higher revenue and lower cost.

Maintain HOLD With An Unchanged TP of RM1.90

We maintain our HOLD rating and DDM-derived TP to RM1.90. At a 2020E dividend yield of 5.0%, IGB REIT is trading at -1.5SD 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. For exposure to the MREITs sector, our top picks are: (i) KLCC (BUY, TP RM8.55) for its defensive earnings and sustainable yield; and (ii) Axis REIT (BUY, TP RM2.04) for its sector-leading EPU growth in 2019E and attractive valuation of 5.4% 2020E.

Source: Affin Hwang Research - 24 Jul 2019