1QFY21 realised net income (RNI) of RM43.7m came in broadly within our (15%) and consensus (16%) expectations as we expect 2HFY21 to see a pick-up in rental income and tenant sales with the opening up of the economy. 1QFY21 GDPU of 1.33 sen is also broadly within. Maintain earnings of RM288-293m for FY21-22E. Maintain OUTPERFORM but on a slightly higher TP of RM1.90 (from RM1.85) as we roll forward valuation base to FY22E.

1QFY21 realised net income (RNI) of RM43.7m came in broadly within our and consensus expectations, at 15% and 16%, respectively, as we expect 2HFY21 to see a pick-up in rental income and tenant sales with the opening up of the economy and roll-out of Covid-19 vaccinations. 1QFY21 dividend of 1.33 sen was declared, which included a 0.01 sen non-taxable portion that is also broadly within at 16% of our FY21 estimate of 8.16 sen, implying 4.6% gross yield.

Results’ highlight. YoY-Ytd, top-line was down by 21% as a result of MCO 2.0 which affected tenants in Jan-Feb 2021, while FY20 saw only the mid-March onwards period affected by the pandemic. As a result, RNI was down by 36% on the back of marginally higher operating cost (+1.2%). QoQ, RNI was down by 39% on the back of a weaker top-line (-33%) due to MCO 2.0 which began in Jan 2021 leading to some tenants requiring rental assistance. Gearing remains stable at low level of 0.23x.

Outlook. The impact of MCO 2.0 will continue to put a strain on retail MREITs as it dampens shoppers’ footfall, car traffic volume and could also result in higher temporary closure of retail shops. That said, we believe FY21 will be better than FY20 as the lockdowns are less strict with more shops allowed to operate compared to the MCO in CY20. 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 FY22-23.

Maintain FY21-22E CNP of RM288-293m on low single-digit positive reversions and minimal expiries. Our FY21-22E GDPU of 8.16-8.27 sen (NDPU of 7.35-7.45 sen) suggest gross yield of 4.5-4.6% (net yield of 4.1-4.2%).

Maintain OUTPERFORM but on a higher TP of RM1.90 (from RM1.85) as we roll forward valuation base to FY22E GDPS/NDPS of 8.27 sen/7.45 sen and on an unchanged +1.1ppt spread to our 10-year MGS yield target of 3.30%. Our applied spread is at average SD, on par with other MREITs under our coverage as we expect IGBREIT to rebound in coming quarters with looser MCO restrictions and effective roll-out of the national vaccination program. We will continue to monitor the situation closely but opt to remain optimistic on improvements to earnings going forward.

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

Source: Kenanga Research - 27 Apr 2021