INVESTMENT HIGHLIGHTS

• 9MFY17 earnings came in within expectations

• Organic growth drives earnings

• Earnings estimates maintained

• Upgrade to BUY with an unchanged TP of RM1.73

9MFY17 earnings came in within expectations. IGB REIT 9MFY17 core net income of RM226.2m is largely within expectations, making up 77.9% and 77.5% of our and consensus full year forecasts respectively. No distribution per unit was declared due to it bi-annual distribution policy.

Organic growth drives earnings. On a sequential basis, 3QFY17 core net income climbed 22.8%qoq to RM83.1m mainly due to normalized maintenance cost and write-back of step-up interest rate arising from the fixed rate term loan that was fully settled during the quarter. Recall that total property expenses of IGB REIT were higher in 2QFY17 due to higher maintenance and property upgrade expenses. On a yearly basis, 3QFY17 earnings were resilient by growing 20.9%yoy, bringing cumulative earnings in 9MFY17 to RM226.2m (+9%yoy). The positive earnings growth was driven mainly by organic growth and write-back of step-up interest rate. Rental reversions of Mid Valley Megamall and the Gardens Mall are at around +5% per annum, underpinning by high occupancy rates of the two malls (close to 100% occupied).

Earnings estimates maintained. We maintain our earnings forecasts for FY17/18. We anticipate earnings growth of IGB REIT to be driven by organic growth of positive rental reversion, as we see no visible asset injection in the near-term.

Upgrade to BUY with an unchanged TP of RM1.73, aligning the percentage upside to the change in our stock recommendation percentage thresholds. We maintain our target price for IGB REIT at RM1.73, based on Dividend Discount Model (DDM) valuation (Required rate of return: 7.5%, Perpetual growth rate: 1.5%). We are positive on the earnings outlook for IGB REIT that likely continue to be driven by positive rental reversion, and dividend yield is attractive at 4.9%.

Source: MIDF Research - 9 Nov 2017