FY18 realised net income (RNI) of RM303.8m came in within consensus (98%) and our expectation (100%). FY18 GDPU of 9.19 sen is also within (95%). We make no changes to FY19E CNP of RM312m and introduce FY20E numbers, but lower FY19 DPU by 3% on a lower payout ratio of 97% (from 100%). Going forward, we expect low-to-mid single-digit reversions on leases' expiries. Downgrade to UP (from MP) on a lower TP of RM1.50 (from RM1.55).

FY18 realised net income (RNI) of RM303.8m came in well within our and consensus estimates at 100% and 98%, respectively. 4Q18 GDPU of 2.28 sen was declared, which included a 0.04 sen nontaxable portion, bringing FY18 GDPU to 9.19 sen which is also within our FY18E target (95%) of 9.69 sen, implying 5.7% gross yield.

Results highlight. YoY-Ytd, top-line was up by 2.1% on higher rental income, likely on stable occupancy and positive reversions. NPI margin improved slightly by 0.9ppt on lower property operating cost. However, higher financing cost (+21.5%) caused RNI to be flattish at 0.1%. Note that FY17 financing cost was lower as a result of the write-back of stepup interest from the fixed rate term loan. QoQ, top-line was up by 2.6% on improved rental income likely due to similar reasons mentioned above as well as possibly higher turnover rent during the 4Q holiday season. However, RNI declined marginally (-0.4%) on the back of higher operating cost (+9.6%) and expenditure (+2.7%).

Outlook. We expect minimal capex of RM25-10m for FY19-20 on minor refurbishments and upkeep of both malls. FY19 will see 23% and 44% of MV and TGM’s NLAs up for expiry. We do not expect any acquisitions in the near-term. Southkey Mall in Johor is slated for completion by end-2018, but we only expect the acquisition after at least one reversion cycle, likely be by FY21.

Maintain FY19E CNP of RM312m and introduce FY20E CNP of RM317m. We anticipate low-to-mid single-digit reversion for both assets for FY19-20. However, we lower our FY19E GDPU by 3% to 9.6 sen as we expect a lower payout ratio of 97% (from 100%) in line with FY18 payout ratio. Our FY19-20E GDPU of 9.6-9.7 sen (NDPU of 8.6- 8.7 sen), suggest gross yields of 5.4-5.4% (net yields of 4.9-4.9%).

Downgrade to UNDERPERFORM (from MARKET PERFORM), and lower our Target Price to RM1.50 (from RM1.55) based on a lower FY19E GDPS/NDPS of 9.60 sen/8.64 sen (from 9.89 sen/8.89 sen), as well as the 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 its fairly stable asset profile and quality. However, at current levels, we are comfortable downgrading IGBREIT to UP (from MP) as we believe we have priced in most positives and the stock is trading at a 67% premium to NAV (vs. MREITs under our coverage of - 16% to +33% to NAV), while strong re-rating catalysts are lacking at this juncture. Current gross yields of 5.6% are below the average yield of MREITs under our coverage of 6.0%.

Risks to our call. Bond yield compressions, stronger-than-expected rental reversions.

Source: Kenanga Research - 24 Jan 2019