1H16 realised net income (RNI) of RM138.8m met both our and market expectations at 53% and 50%, respectively. 1H16 GDPU of 4.41 sen was also in-line (52%) and no changes were made to earnings forecasts. We maintain MARKET PERFORM call with unchanged TP of RM1.66, based on unchanged target gross/net yield of 5.2%/4.7% on FY17E GDPS/NDPS of 8.6 sen/7.8 sen, on a +1.6ppt to our 10-year MGS target of 3.6%.

1H16 realised net income (RNI) of RM138.8m came in within both our and consensus expectations at 53% and 50%, respectively. 1H16 GDPU of 4.41 sen was declared, which included a 0.09 sen non-taxable portion. This is on track to meet our FY16E target (52%) of 8.5 sen, implying 5.2% yield.

Lower gross rental income led to a drag in 2Q16’s RNI. 2Q16 RNI fell 9% QoQ mainly on the back of lower gross rental income (GRI) and lower RNI margins (-2.6ppt to 52.9%), possibly on lower turnover rent as IGBREIT has a high turnover portion (c.13% of GRI) and 1Q tend to benefit from festive season spending. Ytd- YoY wise, 1H16 RNI rose only 2%, half of GRI’s increase (+4%), due to higher reimbursement cost and maintenance expenses. Hence, RNI margin was reduced slightly to 54.2% (-0.8 ppt). Note that IGBREIT does not provide segmental breakdown for MV and TGM.

Outlook. FY16 will see 29% and 45% of MV and TGM’s NLAs up for expiry, respectively, whereas FY17 will have 35% and 40% of MV and TGM’s NLAs up for expiry. We have anticipated rental reversions of 15% for both assets for FY16-17E, which is similar to FY14 reversion rates. We opine that the group is able to achieve higher base rental reversions as their mall rental rates have a higher component 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 news flow on third party asset acquisitions.

Reiterate MARKET PERFORM call with unchanged TP of RM1.66. We maintain our FY16-17E earnings and TP of RM1.66, based on an unchanged target gross/net yield of 5.2%/4.7% on FY17E GDPS/NDPS of 8.6 sen/7.8 sen, on a +1.6ppt to our 10- year MGS target of 3.60%. 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. Hence, we maintain our MARKET PERFORM call.

Risks to our call include bond yield expansions or compressions and weaker-than-expected rental reversions.

Source: Kenanga Research - 27 Jul 2016