9MFY19 realised net income (RNI) of RM240.6m came in well within our (77%) and consensus (76%) expectations. 9MFY19 GDPU of 6.97 sen is also in-line (72%). FY19-20E CNP of RM312-317m remained unchanged. 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 RM2.05 on decent gross yield of 5.0%.

9MFY19 realised net income (RNI) of RM240.6m came in well within our, and consensus, expectations at 77% and 76%, respectively. 3QFY19 GDPU of 2.31 sen was declared, which included a 0.04 sen non-taxable portion, bringing 9MFY19 GDPU to 6.97 sen which is also within our FY19E target (72%) of 9.61 sen, implying 4.9% gross yield.

Results’ highlight. YoY-Ytd, top-line increased by 3.5% on increased rental income mostly from both assets, likely on positive reversions backed by stable occupancy. NPI margin was up marginally by 0.7ppt which resulted in RNI increasing by 5.4%. QoQ, top-line was up slightly by 1.0% as 2Q is generally a weaker quarter, being a non-festive period. This coupled with better NPI margin (+0.9ppt) on slightly lower utilities expenses allowed RNI to increase by 2.4%.

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.

Earnings unchanged. We maintain FY19-20E CNP of RM312-317m, driven by low-to-mid single-digit reversion for both assets on 98% occupancy. Our FY19-20E GDPU of 9.61-9.71 sen (NDPU of 8.65-8.74 sen), suggest gross yield of 4.9-5.0% (net yield of 4.4-4.5%).

Maintain MARKET PERFORM and Target Price of RM2.05. Our TP is based on FY20E GDPS/NDPS of 9.71 sen/8.74 sen and on an unchanged +1.3ppt spread to our 10-year MGS yield target of 3.40%. Our applied spread is on the lower end vs. MREITs under our coverage (+1.3 to +3.2ppt) as we like IGBREIT for having a prime asset profile that consistently delivers stable occupancy and positive reversions. That said, we are comfortable with our MARKET PERFORM call as we believe we have priced in most positives for now, while downside risks are limited. Current gross yield of 5.0% is trading slightly below retail MREIT peers under our coverage of 5.3%.

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

Source: Kenanga Research - 24 Oct 2019