Consistent with the weak consumer sentiment and not-too-optimistic retail outlook for 2016, we anticipate a more challenging outlook ahead for IGB REIT. Maintain NEUTRAL with an unchanged DDM-based TP of RM1.50. However, leveraging on the premium of its established malls MVM and TGM, two of the biggest malls in Klang Valley outside the Golden Triangle area, we expect to the REIT to fare relatively better than other retail malls in smaller suburbs.

Challenging outlook. We concur with IGB REIT’s management view and remain cautious on the overall retail outlook for 2016, due to the still-fragile consumer sentiment, although we expect the outlook to gradually improve in 2H16. Premium malls. We expect IGB REIT to be able to leverage on the premium of its established Mid Valley Megamall (MVM) and The Gardens Mall (TGM) to sustain positive rental reversions and rental income growth in 2016. With the challenging retail environment leading to consolidation among retailers, we believe MVM and TGM would be among the main malls in the Klang Valley with strong appeal to retailers in terms of brand recognition and consumer traffic. Forecasts. We make no changes to our FY16F-18F numbers and DDM-based TP. A key downside risk to our forecasts includes a prolonged weak consumer sentiment, while upside risks include stronger demand for its assets leading to stronger rental reversions.

Within expectations. IGB REIT’s 1Q16 core net profit of RM72.8m (+4.2% YoY, +37.0% QoQ) came in within expectations, at 26/26% of our/street estimates. We believe the positive performance was driven mainly by consumer spending leading up to the Chinese New Year. There was no DPU declared for the quarter, which was consistent with its half-year DPU distribution policy.

Source: RHB Research - 27 Apr 2016