1Q19 realised net income (RNI) of RM82.9m came in well within our (27%), and consensus (25%), expectation. 1Q19 GDPU of 2.40 sen is also in-line (25%). We make no changes to FY19-20E CNP of RM312-317m. Going forward, we expect almost full occupancy on low-to-mid single-digit reversions given IGBREIT’s stable asset profile. Maintain MP and TP of RM1.70 on minimal upsides as gross yield of 5.2% is close to comparable peers’ average.

1Q19 realised net income (RNI) of RM82.9 came in well within our, and consensus, estimate, at 27% and 25%, respectively. 1Q19 GDPU of 2.40 sen was declared, which included a 0.04 sen non-taxable portion, which is also within our FY19E target (25%) of 9.60 sen, implying 5.7% gross yield.

Results highlight. YoY-Ytd, top-line increased by 3.2% on higher rental income, likely on positive reversions backed by stable occupancy. However, higher operating cost (+10.1%) thanks to higher utilities, caused NPI margins to decline by 1.6ppt to 73.3%. This translated directly to the bottom-line, which only increased by 0.8%.

QoQ, top-line was up by 2.9% on similar reasons mentioned above, while operating cost was lower (-7.4%) due to lower utilities and maintenance expenses this quarter. This, coupled with slightly lower financing cost (-2.2%) drove RNI higher by 9.8%.

Outlook. We expect minimal capex of RM25-10m for FY19-20 for minor refurbishments and upkeep of both malls. FY19 will see 23% and 44% of MV and TGM’s NLAs up for expiry, respectively. We do not expect the acquisition of Southkey Mall in Johor in the near term and reckon that it would take at least one reversion cycle for the asset to stabilise before being acquired by IGBREIT, likely by FY21-22.

Maintain FY19-20E CNP of RM312-317m. We anticipate low-to-mid single-digit reversion for both assets for FY19-20 on 98% occupancy. Our FY19-20E GDPU of 9.6-9.7 sen (NDPU of 8.6-8.7 sen), suggest gross yield of 5.2-5.2% (net yield of 4.7-4.7%).

Maintain MARKET PERFORM and Target Price of RM1.70 based on FY19E GDPS/NDPS of 9.60 sen/8.64 sen and an unchanged +1.7ppt spread to our 10-year MGS yield target of 3.90%. Our applied spread is pegged to its historical average level due to its stable asset profile. We are comfortable with our MARKET PERFORM call as we believe we have priced in most positives for now (i.e. close to full occupancy on positive reversions), as well as downside risks, which are limited given IGBREIT’s stable assets. Current gross yield of 5.2% is trading on par with retail MREIT comparable peers under our coverage of 5.2% (note that the peers’ average excludes CMMT, which commands a higher gross yield of 7.0% given its less-than-perfect asset profile from negative reversions and lower occupancy vs. peers).

Risks to our call include: bond yield compressions or expansion, stronger or weaker-than-expected rental reversions.

Source: Kenanga Research - 25 Apr 2019