9M17 realised net income (RNI) of RM226.2m came within market (77%) and our (79%) expectations. No dividends, as expected. As such, we make no changes to FY17-18E NPs of RM286.7-303.9m. Maintain OUTPERFORM and TP of RM1.87, and an unchanged spread of +1.2ppt to our MGS yield target of 4.00%.

9M17 realised net income (RNI) of RM226.2m came in within consensus (77%) and our expectations (79%). No dividends, as expected.

Results Highlights. QoQ, 3Q17 top-line was up by 1.8% on positive rental rates. However, RNI was up by a solid 22.8%; (i) on better NPI margins (+5.3ppt), likely on better cost management, and (ii) driven by lower financing cost on a write-back of step up interest from the fixed rate term loan which was settled this current quarter. YoY-Ytd, RNI was up by 9.0% on the back of; (i) marginal top-line growth (+2.3%) from higher rental income, and (ii) lower financing cost in 3Q17 (-24.8%) due to similar reasons mentioned above. Group gearing is maintained at 0.23x (vs. 0.24x in 3Q16). Note that IGBREIT does not provide segmental breakdown for MV and TGM.

Outlook. We expect minimal capex of RM10-15m on minor refurbishments and upkeep of both malls. 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. Southkey Mall in Johor is slated for completion in 2H18, but we expect the acquisition to only post one reversion cycle, likely by FY21. Note that we make no changes to FY17-18E NP estimates of RM287-304m.

Maintain OUTPERFORM and TP of RM1.87. We maintain our TP based on FY18E GDPS/NDPS of 9.7 sen/8.8 sen, and on an unchanged +1.2ppt spread to our 10-year MGS yield target of 4.00%. We maintain our OUTPERFORM call at current levels, as IGBREIT is commanding attractive gross yields of 6.0% vs. other predominantly retail-based MREITs’ average gross yields of 5.5%. We are comfortable with our call as it is backed by IGBREIT’s prime asset positioning and asset stability that have continuously garnered strong occupancy (>99%) on the back of double-digit reversions, which provide a safety haven for investors.

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

Source: Kenanga Research - 9 Nov 2017