Period

4Q15/FY15

Actual vs. Expectations

FY15’s realised net income (RNI) of RM254.0m came in within our expectation at 102% but broadly within consensus’s estimates at 94%.

Dividends

2H15 GDPU of 3.72 sen per unit (which includes a nontaxable portion of 0.12 sen). This implies FY15 GDPU of 8.28 sen (6.0% yield) or a 99% payout which is within our expectation.

Key Results Highlights

QoQ, topline was flattish at RM121.4m (+0.3%). However, higher operating cost (+12%), attributable to higher property upgrade costs, lowered NPI margins by 3.5ppt to 66.9%. This coupled with higher financing cost (+58%) dragged RNI down by 18%, which we believe was due to higher financing rates. This is a negative surprise given that RNI for fourth quarter usually is the strongest as leases up for expiry are renewed in this quarter.

YoY-YTD, FY15 topline growth was strong (+6%) on positive rental reversions in FY15 for both MV and TGM; to recap, there were 20% and 0.2% of MV and TGM’s NLA leases renewals in FY15. The leap in topline growth is more apparent YoY as the bulk of FY14 rental renewals occurred in 4Q14. Additionally, NPI margin improved by 2.4ppt to 70% due to lower operating costs. Despite higher interest expense (+15%), RNI margins still increased by +1.5ppt to 51.9%. All in, FY15 RNI was up by 9%.

Outlook

FY16 will see 29% and 45% of MV and TGM’s NLAs up for expiry, respectively. We have anticipated rental reversions of 15% for both MV and TGM for FY16E, which is similar to FY14 reversion rates. The group is able to achieve higher base rental reversions as their mall rental rates have a higher proponent of turnover rent.

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 visible injectable assets from its parent while there appears to be no newsflow on third party asset acquisitions.

Change to Forecasts

Post housekeeping, we increased our earnings by 2.8% for FY16E and introduce FY17E.

Our FY16E NDPU stands at 7.7 sen (from 7.5 sen previously) while FY17E NDPUs is 7.8 sen, implying 5.6% and 5.7% net yields, respectively (refer overleaf).

Rating

Maintain MARKET PERFORM

Valuation

Post earnings adjustment, we tweaked our TP higher to RM1.42 (from RM1.38 previously), based on an unchanged target gross yield of 6.0% on FY16E GDPS/NDPS of 8.5 sen/7.7sen (previously GDPS/NDPS of 8.3 sen/7.5 sen). Our target gross yield is based on a +2.0ppt spread to our target 10-year MGS of 4.0%.

Downside risks appear limited as our estimates are conservative, and we have already accounted for weakness from the high turnover rent component previously. However, we do not foresee any near-term re-rating catalyst for IGBREIT.

Risks to Our Call

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

Source: Kenanga Research - 27 Jan 2016