9M18 realised net income (RNI) of RM228.2m came in within consensus (73%) and our expectation (75%). 9M18 GDPU of 6.91 sen was also within (71%). We make no changes to FY18-19E CNP of RM304-312m. Going forward, we expect low-to-mid single-digit reversions. Upgrade to MARKET PERFORM (from UP) on an unchanged TP of RM1.55.

9M18 realised net income (RNI) of RM228.2m came in well within consensus’ (73%) and our expectations (75%). 3Q18 GDPU of 2.29 sen was declared, which included a 0.04 sen non-taxable portion, bringing 9M18 GDPU to 6.91 sen; this was also within our FY18E target (71%) of 9.69 sen, implying 5.7% gross yield.

Results Highlights. YoY-Ytd, top-line was up marginally by 2.0% on higher rental income. NPI margin improved slightly by 1.4ppt on lower property operating expenses. However, higher financing cost (+22.4%) due to the lower financing cost base in 9M17, caused RNI to be flattish at 0.9%. Note 9M17 financing cost was lower as a result of the write- back of step-up interest from the fixed rate term loan. QoQ, 3Q18 top- line was up by 4.5% on improved rental income likely due to higher turnover rent and positive reversions, while 2Qs are also generally a weaker quarter compared to 3Qs. This coupled with stable operating cost (-0.2%) and higher interest income (+16.6%) resulted in RNI increasing by 8.0%.

Outlook. We expect minimal capex of RM15-25m for FY18-19 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 end-2018, but we only expect the acquisition after at least one reversion cycle, which would likely be by FY21.

Maintain FY18-19E CNP of RM304-312m. We anticipate low-to-mid single-digit reversion 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 5.7-5.8% (net yields of 5.1-5.2%).

Upgrade to MARKET PERFORM (from UNDERPERFORM), but maintain TP of RM1.55 based on FY19E GDPS/NDPS of 9.88 sen/8.89 sen, and on an unchanged +2.1 ppt spread to our 10-year MGS yield target of 4.20%. Our applied spread is on pegged to its historical average levels due to IGBREITs stable asset profile and quality. However, at current levels, we are comfortable to upgrade IGBREIT to MARKET PERFORM (from UP) as we are confident that its fundamentals are intact due to minimal downside risk from prime asset positioning and asset stability (i.e. strong occupancy of >99% on positive reversions), while current gross yields are decent at 5.8%, close to large cap retail MREIT peers of 6.0%.

Risks to our call. Bond yield expansions or compressions, weaker or stronger than expected rental reversions.

Source: Kenanga Research - 25 Oct 2018