IGB  REIT’s  2QFY14  net  profit  came  in  line  with  expectations.  The double-digit earnings growth continued to be driven by the kicking-in of The Gardens Mall’s positive rental reversions.  Management  announced a  total  distribution  per  unit  (DPU)  of  3.89  sen  for  1HFY14.  Proactive refurbishment  exercises  will  continue  to  be  the  key  earnings  driver going forward. Maintain NEUTRAL and FV of MYR1.27.

Within  expectations.  IGB  REIT’s  2QFY14  net  profit  of  MYR58.5m (+15.3%  y-o-y,  +1.3  %  q-o-q)  came  in  line  with  our  and  consensusestimates.  The Gardens Mall’s (TGM) major rental renewal in  3QFY13has  resulted  in  earnings  growing  double-digit  y-o-y.  Thus  far,  the negative  impact  of  the  electricity  tariff  hike  and  higher  assessment charges  has  proven  to  be  minimal,  as  its  net  property  income  (NPI) margin  remained stable at 68.1%.  The REIT announced a total DPU of 3.89 sen for 1HFY14, up 13.3% y-o-y.

Company updates.  IGB REIT will continue to reap the benefit of  TGM’s major renewal last year, which saw the tenancy expire  for about 70% of its  NLA  and  the  introduction  of  new  tenants.  Nonetheless,  we  believe that  it  will  still  take  some  time  for  TGM’s  average  rental  of  about MYR9.00psf  to  match  that  of  Mid  Valley  Megamall’s  (MVM),  which  is currently  commanding  average  rental  rates  of  above  MYR10  psf.Management  continues  to  be  proactive  in  enhancing  the  value  of  the more  matured  MVM.  MVM’s  third  floor’s  south  wing  is  currentlyundergoing a major renovation and will be closed for four months from June  onwards.  Given  its  past  track  record,  we  are  confident  that  this exercise  could  result  in  a  better  flow  of  shoppers  and  higher-yielding tenants upon its completion.  

Risks. The risks include further subsidy rationalisation measures, which may lead to inflationary pressure and higher operating costs.

Maintain NEUTRAL.  We make no changes to  our estimates.  Our FV is maintained at MYR1.27.  We believe that TGM still has some value that is  yet to be unlocked and it will continue to be the REIT’s main  organic growth driver.

Source: RHB