FY16 realised net income (RNI) of RM277.8m met market expectation but was below ours at 101% and 106%, respectively. FY16 GDPU of 9.06 sen was also above expectations (106%). Upgrade FY17E CNP by 7.7% and introduce FY18E CNP of RM286.7m and RM303.9m, respectively. Maintain MARKET PERFORM with a higher TP of RM1.73 on a lower spread of +1.2ppt to our MGS target and higher FY17E GDPS/NDPS of 9.2 sen/8.3 sen.

FY16 realised net income (RNI) of RM277.8m came in within consensus (101%) but above our expectations (106%). Top line was within our expectation but the margins were better than expected on flattish operating cost and lower effective financing rates of 4.8% (from 5.1%), improving RNI margins to 55% vs. our FY16E of 52%. 4Q16 GDPU of 4.30 sen was declared, which included a 0.08 sen non-taxable portion bringing FY16 GDPU to 9.06 sen. This was also above our FY16E target (106%) of 8.55 sen, implying 5.2% yield.

Results Highlights. YoY-Ytd, RNI was up by a solid 9.4%, on; (i) higher rental income which increased GRI by 3.7%, (ii) improved NPI margins on flattish operating cost likely on improved cost efficiencies, and (iii) lower financing cost (-8%) as the group’s effective borrowing rate was lowered to 4.8% (vs. 5.1% in FY15), thus improving RNI margins by +2.8ppt. QoQ, top line growth was flat, but lower operating cost (-6%), mostly from lower utilities, maintenance and other operating expense helped improve RNI margins by +1.3ppt to 55.9%, increasing RNI by 2.2%. Note that IGBREIT does not provide segmental breakdown for MV and TGM.

Outlook. FY17E will see 35% and 40% of MV and TGM’s NLAs up for expiry. We have anticipated rental reversions of 15% for both assets for FY17-18, which is similar to historical reversion rates. We opine that the group should be able to achieve higher base rental reversions as their mall rental rates have a higher component of turnover rent. We do not expect any acquisitions in the near-term, as there is no visible acquisition pipeline.

Upgrade FY17E earnings on better margins and introduce FY18E. We upgrade FY17E NP (+7.7%) to RM287m, and introduce FY18E NP of RM304m. FY17E earnings upgrade is on the back of: (i) higher NPI margins to 72% (from 69%) from better cost management, and (ii) lower effective financing rates, closer to current level of 4.8% (from 5.1%), with similar assumptions for FY18E. Consequently, we increased our FY17E NDPU to 8.3 sen (from 7.9 sen) and introduce FY18E NDPU of 8.8 sen, translating to FY17-18E net yield 4.8-5.0%.

Reiterate MARKET PERFORM call with a higher TP of RM1.73 (from RM1.57). Our TP is based on a lower spread of +1.2ppt (from +1.3ppt) to our 10-year MGS target of 4.20% and on a higher FY17E GDPS/NDPS of 9.2 sen/8.2 sen. We are narrowing our spread as MREITs continue to trade higher as investors search for safe yield havens. Our valuations implies a lower target gross/net yield of 5.4%/4.8% vs. MREITs(>RM1b) under our coverage average gross yield of 5.5% due to IGBREITs prime asset positioning and assets stability that has continuously garnered strong occupancy on the back of double digit reversions. Upsides appear limited as we have accounted for the groups strong reversions and improved margins, while near-term re-rating catalyst are lacking with no foreseeable downside risk. 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 - 26 Jan 2017