Period  2Q14/1H14

Actual vs. Expectations  1H14 realised net income (RNI) of RM116.2m came in within expectations, making up 53% of street and our estimates.

Dividends  1H14 GDPU of 3.89 sen (+13% YoY) was declared, which includes a 0.08 sen non-taxable portion. It is on track as it made up 53% of our FY14E GDPU of 7.34 sen (5.8% yield).

Key Results Highlights QoQ, topline growth was unexciting (+1%) on minimal rental reversions in 1H14, which resulted in marginally higher RNI (+1%) due to flattish cost.

 YoY, topline growth was strong, increasing by 8% to RM115.5m due to the double-digit rental reversions in FY13 on 27% and 54% of occupied NLA for MV and TGM. NPI margins improved by 2.2ppt on better cost management efforts which allowed NPI to increase by 11% to RM78.7m. The strong topline growth was sufficient to offset the increase in expenditure (+6%), allowing RNI to increase by 15%.

 YoY-YTD, topline growth was strong, increasing by 10% to RM229.6m due to similar reasons mentioned above. The slight increase in interest income (+27%), and marginal decrease in financing cost (-1%) was sufficient to negate the increase in expenditure (+7%) in 1H14. As a result, RNI increase by 16%, while RNI margins also improved by 2.6ppt.

 Note that the company no longer provides MV and TGM segmental breakdown.

Outlook  Previously, management was guiding strong reversions of 10%-15% on leases up for expiry in FY14E, which is substantial as 37% and 31% of NLA for MV and TGM will be expiring. We expect the bulk of FY14 rental reversions to be felt in 2H14.

 The asset acquisition environment remains challenging due to the low cap rate environment of 5%-6% at present while we believe IGBREIT is unlikely to make any acquisitions in the near-term, albeit their low gearing level of 0.24x.

Change to Forecasts We make no changes to our FY14E and FY15E RNI.

Rating Maintain OUTPERFORM

Valuation  Our call is sector-driven as we expect MREITs to benefit from near term compression in the 10-yr MGS which has been gradually declining from 4.00% to 3.89% since early July-14 in anticipation of a potential European QE. We like IGBREIT for its strong rental reversion opportunities. No changes to our TP of RM1.35 based on FY15E target gross dividend yield of 5.6% (net: 5.0%) or a +1.8ppt spread to the 10-yr MGS of 3.80%.

Risks to Our Call  Bond yield expansion or compression vs. our target 10-yr MGS. Weaker-than-expected rental reversions.

Source: Kenanga