1Q18 realised net income (RNI) of RM82.3m came in well within consensus (24%) and our expectation (27%). 1Q18 GDPU of 2.48 sen was also within (26%). We make no changes to FY18-19E CNP of RM304-312m. Going forward, we expect low to mid-single digit reversions. Maintain MARKET PERFORM and TP of RM1.50.

1Q18 realised net income (RNI) of RM82.3m came in well within consensus (24%) and our expectation (27%). 1Q18 GDPU of 2.48 sen was declared, which included a 0.08 sen non-taxable portion, also within our FY18E target (26%) of 9.67 sen, implying 6.4% yield.

Results Highlights. YoY, 1Q18 top-line was up by 2.3% on higher rental income. NPI margin was up by 4.3ppt on lower property operating expenses. This was on the back of a slight increase in interest income allowing RNI to increase by 9.1%. QoQ, top-line was up by 1.8% on positive reversions, while NPI margin increased by 5.8ppt due to similar reasons mentioned above. All in, RNI increased by 6.6% despite higher expenditure (+5.8%) and financing cost (+16.3%) which increased back to normalised levels post a write-back of step-up interest from the fixed-rate term loan in 3Q and 4Q17.

Outlook. We expect minimal capex of RM15-25m on minor refurbishments and upkeep of both malls. FY18 will see 37% and 18% of MV and TGM’s NLAs up for expiry, while FY19 will see 23% and 44% of MV and TGM’s NLAs up for expiry, respectively. 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.

Maintain FY18-19E CNP of RM304-312m. We anticipate low to midsingle digit reversions for both assets for FY18-19. Our FY18-19E GDPU of 9.7-9.9 sen (NDPU of 8.7-8.9 sen), suggest gross yields of 6.4-6.5% (net yields of 5.7-5.8%).

Maintain MARKET PERFORM and TP of RM1.50. We maintain our TP based on FY18E GDPS/NDPS of 9.7 sen/8.7 sen, and on an unchanged +2.4 ppt spread to our 10-year MGS yield target of 4.00%. Our applied spread is +0.5SD above historical average to encapsulate investors’ concerns of oversupply issues and OPR hikes but we may look to remove this going forward once confidence returns to MREITs’ valuations. We maintain our MARKET PERFORM call at current levels, as IGBREIT is commanding decent gross yield of 6.4% vs. other predominantly retail-based MREITs’ average gross yields of 6.2%. We are comfortable with our call as we see minimal downside risk for IGBREIT in light of its prime asset positioning and asset stability (i.e. strong occupancy of >99% on positive reversions).

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

Source: Kenanga Research - 24 Apr 2018