IGBREIT’s 1QFY23 net profit of RM96.2m (up 13% YoY) and DPU of 2.80 sen are ahead of our full-year expectations, prompting us to raise our forward earnings. We maintain our MARKET PERFORM recommendation with a higher TP of RM1.80 based on a target yield of 6.0% (which implies a 1.5% yield spread above our 10-year MGS assumption of 4.5%) as we roll over our valuation window to FY24.

Above expectations. On the back of gross revenue of RM154.6m (+16% YoY), core net profit stood at RM96.2m (+13% YoY) in 1QFY23, accounting for 28% of both ours and consensus full-year estimates. 1QFY23 DPU of 2.80 sen is also above our FY23 projection of 9.9 sen.

Results’ highlights. While the top-line performance was lifted mainly by stronger-than-expected rental income, after accounting for higher property operating expenses (+38% YoY to RM36.1m) mainly arising from higher utilities expenses and reimbursement costs, net property income (NPI) was up 10% YoY to RM118.6m.

By segmental contribution, Mid Valley Megamall registered NPI of RM84.7m (+11% YoY) while The Gardens Mall contributed the balance NPI of RM33.9m (+8% YoY). This comes as both property assets continued to enjoy high occupancy rates of ~100% as of end-March 2023 (similar to end-December 2022’s 99.9%) as gearing level was unchanged at 23% QoQ.

Outlook. The first quarter saw average gross monthly rental income already surpassing the 2019 levels for both malls (by 13% and 22%). As the operating environment has normalised post-pandemic, IGBREIT will likely see a more stable earnings pattern going forward, notwithstanding the prevalence of the challenging macroeconomic outlook and elevated inflationary environment.

Forecasts upgrade. Following the results, we have tweaked our net profit forecasts to RM362.1m (+6.2%) for FY23 and RM375.4m (+5.7%) for FY24. Our corresponding gross DPU projections now stand at 10.5 sen (from 9.9 sen) and 10.8 sen (from 10.2 sen), respectively, which imply yields of 5.9% and 6.3%.

Still a MARKET PERFORM. After rolling over our valuation window to FY24, we have raised our TP to RM1.80 (from RM1.65 previously) based on an unchanged target yield of 6.0% (which is derived from a 1.5% yield spread above our 10-year MGS assumption of 4.5%). This takes into consideration IGBREIT’s quality asset portfolio (as reflected by the high occupancy rates) amid the competitive retail industry environment. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) bond yield contraction/expansion, (ii) higher/lower-than-expected rental reversions, and (iii) higher/lower than-expected occupancy rates.

Source: Kenanga Research - 28 Apr 2023