INVESTMENT HIGHLIGHTS

• 1HFY18 earnings on track
• Earnings on track
• Earnings estimates maintained
• Downgrade to NEUTRAL with an unchanged TP of RM1.73

1HFY18 earnings on track. IGB REIT 1HFY18 core net income of RM152.4m came in within expectations, making up 50% and 48% of our and consensus full year estimates. IGB REIT announced distribution per unit (DPU) of 2.14sen for 2QFY18, bringing cumulative DPU to 4.62sen for 1HFY18. Note that IGB REIT has changed its distribution policy to quarterly from half-yearly.

Earnings on track. On a sequential basis, 2QFY18 core net income dropped 14.7%qoq to RM70.2m mainly due to seasonally lower shopper traffic in 2Q as festive season helped to draw higher shopper traffic in 1Q. Meanwhile, 2QFY18 earnings were solid on yearly basis, growing by 3.6%yoy. That brought cumulative earnings in 1HFY18 to RM152.4m (+6.5%yoy). The solid earnings growth was supported by positive rental reversion in Mid Valley Megamall and the Gardens Mall. Rental reversion of the two malls is at around +5% per annum, underpinned by high occupancy rates of the two malls (close to 100% occupied). Going forward, we expect rental reversion of the two malls to remain solid due to high occupancy rates.

Earnings estimates maintained. We make no changes to our earnings forecasts for FY18/19. Earnings prospect of IGB REIT expected to remain positive, driven by organic growth of positive rental reversion.

Downgrade to NEUTRAL with an unchanged TP of RM1.73. 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%). While we like stable rental incomes from Mid Valley Megamall and The Gardens Mall that translate into minimal earnings risk to unit holders, dividend yield had tapered off to 5% following the recent increase in share price. In view of the limited upside and narrowing dividend yield after the recent price run, we are downgrading our call on IGBREIT to Neutral from Buy.

Source: MIDF Research - 16 Jul 2018