Period

2Q15/1H15

Actual vs. Expectations

1H15’s realised net income (RNI) of RM135.7m came in within market expectation but above our estimate, making up 55% of consensus estimate and 59% of ours. The reason for the stronger results was due to better-thanexpected NPI margin on cost savings (refer overleaf).

Dividends

1H15 GDPU of 4.47 sen per unit (which includes a nontaxable portion of 0.07 sen). This is also above expectation, making up 59% of our FY15E GDPU of 7.56 sen (5.9% yield).

Key Results Highlights

QoQ, topline was down by 3% to RM121.4m, possibly on lower turnover rent as IGBREIT has a high turnover portion (13% of GRI), as GST kicked-in during 2Q15 (April-15). The slightly lower operating cost was not sufficient to bolster NPI margins which declined by 0.9ppt to 71%, while lower interest income (-12%) and higher financing cost (+1%), dragged down RNI by 6% to RM65.8m.

YoY, topline growth was strong, increasing by 7% to RM246.8m on positive rental reversions in FY14 and 1H15 for both MV and TGM. The leap in topline growth is more apparent YoY as the bulk of FY14 rental renewals occured in 4Q. Additionally, NPI margins improved by 3.5ppt to 71% on: (i) lower utilities cost, (ii) lower quit rent assessment expenses, and (iii) operating expenses, possibly on lower A&P cost while higher interest income (+15%) pushed RNI up by 17% to RM135.7m.

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, respectively, in FY15 vs. 15% for both assets in FY14. Our softer rental reversions are due to IGBREIT’s higher portion of turnover rent (13% vs. other similar-sized malls under our coverage of 2%-3%) as the implementation of GST in April-15 may affect tenants’ revenue.

We believe IGBREIT is unlikely to make any acquisitions in the near-term, despite their low gearing level of 0.24x, as we see no attractive assets from their parent or third parties.

Change to Forecasts

We increase our FY15-16E RNI by 8%-5% on margin improvements. Our FY15-16E NDPUs is now at 7.4-7.5 sen, implying 5.7-5.8% net yields.

Rating

Maintain MARKET PERFORM

Valuation

Upgrade TP to RM1.41 (from RM1.33) after rolling forward to FY16E (from FY15E) on and higher GDPS of 8.3 sen (net: 7.5 sen). Our TP is based on a higher target gross yield of 5.90% (from 5.70%) to our target 10-year MGS of 3.90%. We have increased our yield spread to +2.0ppt (from 1.8ppt) due to possible higher perceived topline risk as there is QoQ weakness and a high turnover rent component. While downside risks appears limited as the stock has been recently sold down, we do not foresee any near-term re-rating catalyst for IGBREIT, while its FY16E gross dividend yields is on close with its peer average of 6.4% (net: 5.8%)

Risks to Our Call

Bond yield expansion or compression vs. our target 10- year MGS. Weaker-than-expected rental reversions.

Source: Kenanga Research - 29 Jul 2015