IGBREIT's 1QFY24 results and distribution were within expectations. We understand that one of its key tenants, Metrojaya, may give up part of its current floor space, as it appears to explore digital strategies. This potentially provides IGBREIT the opportunity to bring in higher-yielding new tenants.  We maintain our forecasts, TP of RM1.68 and MARKET PERFORM call.

IGBREIT’s 1QFY24 core net profit of RM102.3m met expectations, making up 27% and 26% of our full-year forecast and full-year consensus estimate, respectively. The group also announced a distribution of 2.96 sen, on track to meet our full-year forecast of 10.8 sen.

YoY, its 1QFY24 revenue increased by 5% attributable to higher rental income in both Mid Valley and The Gardens Mall. That said, we noted that average occupancy rates closed at 94.3% (from near 100%) with a key tenant in Mid Valley (i.e. Metrojaya) surrendering its tenanted net lettable area of c.200k sf at end-Mar 2024 for reconfiguration. Its net property margin declined slightly to 76.4% (-0.3ppt) owing to its attached cost. Excluding the fair value losses, its core net profit comes in at RM102.3m (+6%).

QoQ, its revenue increased by 3% likely due to positive rental reversions as occupancy rates were fairly full. Its core net income rose by 10% due to the low-base effect from the preceding quarter arising from hiked operating expenses, likely in lieu of year-end seasonal expenses and upkeep.

Outlook. In the immediate term, IGBREIT could continue to see encouraging seasonal spending supported by Hari Raya festivities.

Aside from this, we opine that its assets should remain relevant thanks to their wide range of tenants that cater to various income groups. With regards to the tenancy status of Metrojaya, we understand from recent media articles that they are slated to rebrand to “MJ by Metrojaya” which could refresh the vibrancy of footfalls when it reopens during the targeted 3QFY24 period. That said, as Mid Valley is already supporting a strong departmental store anchor tenant via Aeon, and with Metrojaya anecdotally experiencing lower foot traffic, it may downsize its physical store front as it pivots into the online market place. Should this come to pass, it may enable IGBREIT to reoptimize its NLA to bring in more tenants, similar to SUNREIT’s recent strategy with Sunway Pyramid.

Forecasts. Maintained. As of now, we have not reflected any potential rental income losses from Metrojaya as the departmental store appears to be still maintaining its presence in Mid Valley.

Valuations. We also maintain our TP of RM1.68 based on an unchanged target yield of 6.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%) against FY25F’s 10.9 sen distribution per unit. This considers IGBREIT’s strong asset portfolio, evident in its high occupancy rates. However, this is likely already reflected into its share price given the recent interest in the stock even in the face of inflationary challenges. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 4). Maintain MARKET PERFORM

Risks to our call include: (i) bond yield expansion, (ii) higher/lower- than-expected rental reversions, (iii) lower-than-expected occupancy rates, and (iv) loss of footfall to new malls.

Source: Kenanga Research - 18 Apr 2024