1Q17 realised net income (RNI) of RM75.4m met both market expectation and our expectations at 26%. No dividends, as expected. We make no changes to FY17-18E RNI of RM286.7-303.9m. Upgrade to OUTPERFORM (from MP) with a higher TP of RM1.82 (from RM1.73) as we roll forward valuation to FY18E, on an unchanged spread of +1.2ppt to our MGS target of 4.20%.

1Q17 realised net income (RNI) of RM75.4m came in well within consensus and our expectations at 26%. No dividends, as expected.

Results Highlights. QoQ, top-line was up by a strong 6.4% on positive rental reversions, and 1Q is generally the strongest quarter (similar to FY14 and FY15) likely due to better sales during the Chinese New Year festive period. This was on the back of slight improvement in RNI margins by 0.5% from lower financing cost (- 3.4%), resulting in RNI increasing by a solid 7.3%. YoY, RNI was up by 3.5% on: (i) higher rental income, which increased GRI by 1.9%, and (ii) lower financing cost (-3.2%). Note that IGBREIT does not provide segmental breakdown for MV and TGM.

Outlook. FY17 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 reckon 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. As such, we make no changes to FY17-18E RNI of RM287-304m.

Upgrade to OUTPERFORM (from MP) with a higher TP of RM1.82 (from RM1.73). We upgrade our TP post rolling forward our valuations to FY18E GDPS/NDPS of 9.7 sen/8.8 sen, and on an unchanged spread of +1.2ppt to our 10-year MGS target of 4.20%. We upgrade our call to OUTPERFORM (from MP) as at current level, IGBREIT is commanding better gross yields of 5.8% vs. other predominantly retail-based MREITs’ average gross yields of 5.5%, and 13% total returns. Additionally, we are comfortable with our OUTPERFORM call as it is backed by IGBREIT’s prime asset location and asset stability that has continuously garnered strong occupancy on the back of double-digit reversions, which should provide a flight for safety for investors.

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

Source: Kenanga Research - 26 Apr 2017