Period  4Q14/FY14

Actual vs. Expectations  FY14 realised net income (RNI) of RM232.6m came in within expectations, making up 103% of consensus estimates and 105% of ours.

Dividends  4Q14 GDPU of 3.9 sen per unit (which includes a nontaxable portion of 0.08 sen). This implies FY14 GDPU of 7.79 sen (5.9% yield) which met expectations. The payout ratio for FY14 was 100%, which also met our expectation.

Key Results Highlights  QoQ, topline was up by 6% to RM119.6m on higher rental reversions on lease expiries which generally tends to kick-in in 4Q. This was on the back of 37% of NLA expiring in MV and 31% in TGM in FY14. NPI margins were lower by 7.3ppt to 64% due to: (i) higher operating cost (+404%) which could be due to promotional costs which a lot of malls have been doing to maintain business since FY14 was challenging, and (ii) reimbursement cost (+23%). The higher cost coupled with slightly lower interest income (-8%) dragged down RNI by 6% to RM56.2m.

 YoY-Ytd, topline growth was strong, increasing by 7% to RM461.7m from double-digit rental reversions in FY13, which full impact is more apparent in FY14, as well as rental reversions recognised in the early part of FY14. The improvement in NPI margin by 1.4ppt, and higher interest income (+12%) was sufficient to negate the increase in expenditure (+7%) in FY14. As a result, RNI increase by a solid 12.4% to RM232.6m, while RNI margins also improved by +2.3ppt.

 Note that IGBREIT no longer provides a segmental breakdown for MV and TGM.

Outlook  FY15 will see 20% and 0.2% of MV and TGM NLA up for expiry, respectively. We have anticipated softer rental reversions of 10% and 9% for MV and TGM in FY15 vs. 15% for both assets in FY14. This is due to IGBREITs higher portion of turnover rent (13% vs. other similarsized malls under our coverage of 2%-3%) as the implementation of GST in April-15 may affect tenants’ revenue.

 The asset acquisition environment appears to be improving as our channel checks suggested that property sellers are becoming more realistic with asking cap rates, while 3 REITs under our coverage have already done acquisitions in the past 12 months. However, we believe IGBREIT is unlikely to make any acquisitions in the near-term, despite their low gearing level of 0.24x.

Change to Forecasts  We make no changes to our FY15E RNI and introduce FY16E. Our FY15E and FY16E NDPU is 6.8 sen and 7.1 sen (5.2% and 5.4% yield), respectively.

Rating Maintain MARKET PERFORM

Valuation  Maintain TP of RM1.26 based on unchanged target gross yield of 5.7% (net: 5.4%) on FY15E GDPS of 7.6 sen (NDPS: 6.8 sen). Our target gross yield is based on +1.8ppt spread to our target 10-yr MGS of 4.20%.

 We do not expect any further downside to our call at this juncture as any potential weakness has been accounted for. At the same time, we do not foresee any positive rerating catalyst for IGBREIT. IGBREITs FY15E dividend yields is on par with its peer average at 5.8%

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

Source: Kenanga