• Maintain BUY and MYR1.91 TP, 16% upside and c.6% yield. 1H23 results were in line with expectations as IGB REIT recorded stronger topline growth YoY, but reported lower margins due to higher utility costs. Lease renewals remain a non-concern with occupancy rates at almost 100% – management is already focused on renewing leases expiring in early 2024. We continue to like the REIT as a proxy to the recovering domestic economy due to its fully tenanted assets and higher-than-average proportion of turnover rent.

• Within expectations. 2Q23 core profit of MYR81m (-15.9% QoQ, -3% YoY) brought 1H23 earnings to MYR177.4m (+5.1% YoY). This accounted for 51% and 49% of our and consensus full-year estimates. Revenue in the quarter fell 8.5% QoQ from a seasonally slower quarter, but increased 5.8% YoY from higher rental reversions. 1H23 NPI margin was compressed at 74.7% vs 79.8% in 1H22 due to the increase in utility costs (+34% YoY), but we understand that management is not looking to pass on the higher costs directly to tenants at the moment (via service charge). A DPU of 2.37 sen was declared, bringing the 1H23 total to 5.17 sen (1H22: 4.96 sen).

• Strong asset quality. In 2Q23, Mid Valley Megamall’s gross monthly rental stood at MYR16.27 psf, a 9.7% improvement YoY (-3.9% QoQ), while The Gardens Mall’s rental rate of MYR15.29 psf was a 17% improvement YoY (-3% QoQ). This is attributed to the higher-than-average turnover rent portion as on a base rent basis, management guided that rental reversions ranged from a positive low-single digit to mid-single digit. For FY23, there are no concerns on non-renewals with management already focused on renewing leases that are expiring in early 2024, and both malls remain essentially fully occupied.

• Outlook. We think that IGB REIT will continue to benefit from the resilient domestic economy. All of the REIT’s borrowings are also on a fixed rate of 4.49% which has protected it from the increase in interest rates over the past year. The country’s easing inflationary pressure, and improving labour market are positives for the retail market, but we are keeping an eye out on details of the proposed luxury tax and how it might impact retail sales.

• Maintain BUY. We keep our earnings forecasts unchanged as results are in line with expectations. Our TP incorporates a 2% ESG premium, based on our in-house methodology. Downside risks include worse-than-expected economic conditions, slowdown in retail sales, and intensifying competition.

Source: RHB Research - 27 Jul 2023