Downgrade to HOLD

We downgrade IGBREIT to HOLD (from BUY) on narrowed FY19/20E net DPU yields of 4.6/4.8%, below the sector’s average of 5.2/5.3% after a good 9% YTD appreciation in the REIT’s unit price. At this juncture, near- term growth catalyst is lacking to support our BUY call, despite sustained organic growth from positive rental reversions and high occupancies. Our earnings forecasts and DDM-TP of MYR1.85 (Ke: 7.6%) are unchanged.

Mainly organic for now

We remain confident that MidValley Megamall and The Gardens Mall would sustain their positive rental reversions and occupancy rates, attributed to the malls’ prominent location. This, in turn, would sustain high footfall and strong demand for their retail space. Elsewhere, we note that these malls continue to record average single-digit tenant sales growth in FY18 (decent, in our view). Malls’ occupancy stay high at 99% at MidValley Megamall and 96% at The Gardens Mall end-FY18.

Estimates unchanged

We maintain our earnings forecasts for now. Our FY19-21 core EPU growth estimates of 3-6% assume single-digit, positive rental reversions and sustained high occupancy rates at both malls. We have not imputed additional asset(s) into our forecasts.

Looking south for growth

We anticipate IGBREIT’s next major growth catalyst to be the acquisition of Mid Valley Southkey mall in Johor Bahru from its sponsor, IGB Corp (IGB MK; Not Rated). The mall is targeted to open in 2Q19. However, we expect this acquisition to only take place after the first tenancy cycle of 3 years, i.e. earliest FY22. IGBREIT’s future acquisitions are backed by its strong end-FY18 gross gearing of just 0.23x. Risk statement: There are several risk factors for our earnings estimates, price target, rating for IGBREIT. Changes in rental rates, occupancy rates, operating expenses and interest rate may lead to lower earnings for IGBREIT. 1/3 of IGBREIT’s NLA is due for lease renewal in 2019, while all its debt is on fixed rates. [Prior:BUY]

Source: Maybank Research - 10 Jun 2019