• IGB REIT (IGBREIT) reported a good set of results – 3Q20 realised net profit grew by 294% qoq to RM76.8m on sharp recovery in revenue.
• The Results Were Within Market But Above Our Expectations.
• We were pleasantly surprised by the strong recovery from IGBREIT following 2Q20 lows. As we were too conservative in our forecasts previously, we raise our 2020-22E earnings by 1-20%. Reaffirm HOLD rating with a higher target price of RM1.72.

A solid quarter - 3Q20 realised net profit increased by 294% to RM76.8m

IGBREIT’s 3Q20 realised net profit recovered strongly to RM76.8m (+294% qoq) on the back of higher revenue of RM130.7m (+111% qoq) against a low base in 2Q20. Recall that IGBREIT provided rental support to tenants affected by the government’s Movement Control Order (MCO) in 2Q20. NPI margin was also higher by (+14.5 ppt) to 74.8%. Tracking the higher earnings, IGBREIT declared a higher 3Q20 DPU of 2.11 sen, a +240% increase qoq.

9M20 Realised Net Profit Was 31.5% Lower at RM164.7m

Sequentially, IGBREIT’s 9M20 realised net profit fell 31.5% yoy to RM164.7m mainly due to the rental assistance programme in 2Q20. Revenue fell 23% yoy to RM317.7m while NPI margin was lower by 3ppt to 70.4%. Overall, the earnings were within the street’s but above our expectations - making up 75% of the street and 93% of our full-year earnings forecasts. Key variance against our forecasts was due to stronger-than-expected rental revenue stemming from lower rental assistance given during the quarter.

Tweaking Our 2020-22E EPU Forecasts Higher With a Higher TP of RM1.72

We believe our previous forecasts were too conservative and have adjusted our 2020- 22E earnings higher by 19.9%/6.0%/0.6% to take into account lower rental assistance given to tenants. While KL/Selangor are currently under a second CMCO, we believe the government is unlikely to re-implement a full MCO whereby businesses are restricted to operate. Thus, though we believe rental assistance would prolong, the quantum should be lower going forward and given on a case-by-case basis. Footfall at the malls were at 85% pre-Covid-19 levels prior to the second CMCO. Maintain our HOLD call on IGBREIT with a higher DDM-derived target price of RM1.72 (from RM1.71). Downside risk to our HOLD rating is prolonged need for rental assistance while upside risk is strong pent-up demand that pushes retail sales

Source: Affin Hwang Research - 27 Oct 2020