• IGB REIT’s (IGBREIT) 1Q21 realised net profit fell by 39.4% qoq to RM43.7m due to the negative effects of reimplementation of MCO 2.0 during the quarter
• We deem the results to be within expectations as we expect earnings to catch up in the coming quarters from further easing of restrictions and as more of the population are vaccinated
• Maintain BUY with a higher DDM-based target price of RM1.96 after lowering our discount rate to 7.5% (from 7.9%) in anticipation of higher investor demand for recovery plays and IGBREIT’s fast-paced recovery from pandemic lows

Reimplementation of MCO 2.0 during the quarter led to sluggish 1Q21 results

IGBREIT’s 1Q21 realised net profit fell by 39.4% qoq to RM43.7m. This was mainly due to the reimplementation of MCO 2.0 which saw some businesses not allowed to operate and the reimplementation of inter-district and inter-state travel restrictions. As a result, footfalls in the malls were sluggish during the quarter, leading to a need for higher rental support extended to tenants and lower car-park income. A higher allowance for impairment of trade receivables arising from the Covid-19 pandemic and resultant MCOs was also recognised during the quarter. Tracking the lower earnings, IGBREIT declared a lower 1Q21 DPU of 1.33 sen, a 36.1% decrease qoq.

Sequentially, realised net profit was 36% lower yoy; within expectations

Similarly, IGBREIT’s 1Q21 realised net profit fell by 36% yoy. Overall, the results made up 16% and 17% of the street’s and our full-year estimates respectively. We deem the results as in-line with our expectations as we expect gradual improvement in earnings performance in the coming quarters from the gradual easing of restrictions as more of the population are vaccinated. Following the allowance of inter-district travels in early March as Klang Valley transitioned from MCO 2.0 to CMCO, we gathered that footfalls in the malls have returned to 70-80% pre-Covid 19 level.

Maintain BUY With a Higher TP of RM1.96

Overall, we raise our DDM-derived TP to RM1.96 (from RM1.82) after incorporating a lower cost of equity of 7.5% (from 7.9%) in anticipation of higher investor demand for recovery plays and due to IGBREIT’s fast paced recovery from pandemic lows. We maintain our BUY rating. At a 2022E dividend yield of 5.4%, valuations look attractive. IGBREIT remains one of our preferred picks among the retail-centric MREITs as we like its premium assets, strong balance sheet and recovery momentum post 2Q20 low.

Key risks

Downside risks to our BUY rating are prolonged and higher quantum of rental assistance extended to tenants, weaker purchasing power which hampers retail sales and a rate hike.

Source: Affin Hwang Research - 27 Apr 2021