IGBREIT’s 1HFY23 core net profit and distribution per unit were within expectations. We anticipate the group’s portfolio to remain resilient with its near complete tenancy ratio and premium assets likely able to overcome near-term headwinds in consumer spending. Although we maintain our assumptions and TP of RM1.80 (based on a 6.0% target yield), we upgrade the stock to OP (from MP) as the current share price weakness presents opportunities to increase exposure to IGBREIT’s high quality assets.

1HFY23 within expectations. 1HFY23 net earnings of RM177.2m made up of 49% of both our full-year forecast and consensus full-year estimates. A distribution per unit of 2.37 sen (YTD: 5.17 sen) is also within expectations.

YoY, 1HFY23 revenue saw a 11% growth thanks to positive rental reversion. Given that occupancy rates for Mid Valley Megamall and The Gardens Mall are almost full (100%), IGBREIT may command better rental rates. On the flipside, net property income margin did see some compression (72.6%, -6.4ppt) on higher utilities consumption and refurbishment costs. Ultimately, this led to 1HFY23’s net distributable income and core earnings coming in at RM190.2m (+5%) and RM177.2m (+5%), respectively.

Outlook. Spending in the consumer retail space could be challenged by inflationary and foreign exchange pressures which could undermine disposable income. That said, higher income bracket groups may be somewhat unhindered given their greater level of financial security. IGBREIT’s assets will likely continue to be preferred locations for such crowd while being decentralised from the busier hubs in Kuala Lumpur. Still, we reckon the group may continue to incur high refurbishment cost to ensure that its properties remain fresh and attractive to its visitors.

Forecasts. Post-results, we maintain our FY23F/FY24F earnings.

Upgrade to OUTPERFORM (from MARKET PERFORM) with a TP of RM1.80. Our TP is based on our FY24F gross DPU of 10.8 sen against an unchanged target yield of 6.0% (derived from a 1.5% yield spread above our 10-year MGS assumption of 4.5%). We believe the current share price reflects an underappreciation of its portfolio of premium retail assets, where we reckon consumer spending could be less susceptible to inflationary headwinds. Its focus in managing high-value assets efficiently is also translated in its leading ROE of c.10% (vs. peer average c.6%). There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 27 Jul 2023