IGB REIT reported a decent set of numbers – 2019 realised net profit grew by 4.0% yoy to RM315.9m on higher revenue (+3.1% yoy) and stable NPI margin. Nevertheless, 2019 distributable income grew by a muted 0.1% yoy due to higher management fees paid in cash, resulting in a 0.3% decline in DPU to 9.16 sen. Overall, the results were within market and our expectations. We maintain our BUY rating but lower our DDM-derived TP to RM2.12 (from RM2.15) after incorporating a higher cash / lower units payout for management fees. Looking ahead, we expect IGB REIT’s valuation to see further positive re-rating, driven by an increasing scarcity premium for highquality retail assets with robust growth prospects and low gearing.

Decent earnings but DPU slipped due to higher cash payments for management fees

IGB REIT reported a decent set of results – 2019 realised net profit grew by 4.0% yoy to RM315.9m on higher rental income (+3.1% yoy) and robust NPI margin of 72%. We believe the reconfiguration exercise involving 5% of NLA in Mid Valley (previously tenanted to AEON) has helped lift revenue and profitability. 2019 distributable income, however, increased by a mere 0.1% yoy due to higher cash / lower units payment for management fees. In 2019, IGB REIT paid 65% of management fees in units (from 100% previously). As a result, 2019 DPU declined by 0.3% yoy to 9.16 sen (FY18: 9.19 sen).

Earnings Sequentially Weaker Due to Higher Costs

IGB REIT’s 4Q19 realised net profit fell by 5.7% qoq to RM75.3m due to higher maintenance expense, which more than offset the 2.4% revenue growth. Moving ahead, we expect maintenance expenses to normalise to RM4.5m-RM6.5m / quarter (from the record RM9.8m in 4Q19).

Maintain BUY With a Lower TP of RM2.12

We tweaked our 2020-21E realised EPU forecasts by -0.1% / +0.2% and lowered our DPU forecasts by 3% after incorporating a higher cash (lower units) payment for the management fees. In tandem, we have revised our DDM-derived TP to RM2.12 from RM2.15. Maintain BUY. IGB REIT remains our top pick within the retail MREITs due to its stellar earnings track record, proactive management with innovative asset enhancement activities (AEI), efficient cost control and low gearing ratio. Downside risks: lower-than-expected earnings, reversal in global yield trend.

Source: Affin Hwang Research - 23 Jan 2020