1QFY20 realised net income (RNI) of RM68.3m came in within our (29%) and consensus (22%) expectations. 1QFY20 GDPU of 1.94 sen is also in line (26%). Maintain FY20-21E CNP of RM235-299m. Next quarter will prove to be challenging in light of the MCO. Maintain MP but with a higher TP of RM1.65 (from RM1.50) on lower MGS target of 3.30%.

1QFY20 realised net income (RNI) of RM68.3m came in within our, and consensus, expectations at 29% and 22%, respectively. 1QFY20 GDPU of 1.94 sen was declared, which included a 0.04 sen non taxable portion, which is also within our FY20E target (26%) of 7.37 sen, implying 4.3% gross yield.

Results’ highlight. YoY, top-line was down 11.5% mainly due to declining shopper traffic since Jan which worsened after the MCO came into effect on 18th March 2020. All in, RNI was down by 17.5% despite lower operating expense (-3.5%) and lower expenditure (-7.9%). QoQ, top-line was down by 10.5% due to similar reasons mentioned above, while bottom-line was down by 9.2% despite: (i) significantly lower operating cost (-15.9%) mainly from maintenance expenses, (ii) and lower expenditure (-5.1%).

Outlook. Current situation remains challenging with only essential services stores inside its malls allowed operations since March 18th 2020, while the REIT has also curated rental support on a case-by-case basis for tenants. We expect minimal capex of RM10-15m for FY20-21 for minor refurbishments and upkeep of both malls. 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 or longer in light of the Covid-19 pandemic for the asset to stabilise before being acquired by IGBREIT, likely by FY22.

We maintain FY20-21E CNP of RM235-299m. To recap, we recently trimmed IGBREIT’s earnings by 24-7% for FY20-21 in our recent MREITs 2QCY20 strategy on expectations of a prolonged MCO in 2020 (c. 3 months), and the need forrental support. We made no changes to earnings for now but will continue to monitor the situation as a prolonged MCO may affect FY20 earnings. Our FY20-21E GDPU of 7.37-9.12 sen (NDPU of 6.63-8.20 sen) suggest gross yield of 4.3-5.3% (net yield of 3.9-4.8%).

Maintain MARKET PERFORM but with a higher TP of RM1.65 (from RM1.50) post lowering our 10-year MGS target to 3.3% (from 3.7%), given the sharp plunge in bond yields in April 2020 to 2.9% given heightened uncertainty in equity markets after the dip in oil prices. In light of the highly fluid bond markets, we continue to monitor the situation closely but remain conservative on bond pricing for now until the entire Covid-19 situation is resolved. Our TP is based on FY21E GDPS/NDPS of 9.12 sen/8.20 sen and on an unchanged +2.3ppt spread to our 10-year MGS yield target of 3.30%. Our applied spread is at +2.0SD, on par with other MREITs under coverage to account for earnings risk and MGS uncertainty.

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

Source: Kenanga Research - 23 Apr 2020