• Keep BUY, new DDM-derived MYR2.03 TP from MYR1.98, 16% upside and c.6% yield. IGB REIT’s 1Q24 results were in line with expectations, with the REIT reporting solid earnings growth in a seasonally strong quarter. We expect the REIT to record mid-single-digit rental reversion growth, backed by its fully occupied malls. However, Mid Valley Megamall’s (MVM) occupancy rate has dropped to 89% temporarily as it undergoes reconfiguration works to refresh its offerings.

• Results in line. 1Q24 core profit of MYR102.3m (+10% QoQ, +6% YoY) was in line with expectations at 27% of our and Street’s estimates. Revenue and NPI improved 5.1% and 4.8% YoY respectively from higher rental income, and NPI rose 8% QoQ due to higher upgrading costs in 4Q23. Interest expense stayed flat as 100% of the REIT’s borrowings are on fixed rate medium term notes. A DPU of 2.96 sen was declared for the quarter (4Q23: 2.70, 1Q23: 2.80).

• Reconfiguration works. IGB REIT began reconfiguration works on 200k sqf or 11% of MVM’s NLA. The space is occupied by Metrojaya, and will be reconfigured to incorporate new tenants to reinvigorate the space. Management guided that it should be completed in 3Q24. Despite the potential impact to rental, we think the long-term upside to rental rates – as less space will be occupied by an anchor tenant – outweighs the relatively small, short-term cost, especially as MVM’s occupancy rates are typically full.

• Improved rental rates. In 1Q23, MVM’s gross monthly rental income stood at MYR19.80 psf (2023: MYR16.28 psf), while The Gardens Mall’s (TGM) rental income improved to MYR16.09 psf (2023: MYR15.59 psf). We do not foresee a significant risk to occupancy rates, with the typical 22-31% of NLA up for renewal this year for the two malls. We expect IGB REIT to record mid- single-digit rental reversion growth in FY24. While the inflationary environment remains the biggest risk to retail sales, we think the delay of the implementation of the High-Value Goods Tax provides a temporary relief.

• We lower our FY24F earnings estimates by 2% to account for the reconfiguration works, and raise our TP to MYR2.03 after reducing our risk free rate assumption in anticipation of a lower interest rate environment. Our TP incorporates a 0% ESG premium/discount.

• Downside risks include worse-than-expected economic conditions, a slowdown in retail sales, and intensifying competition.

Source: RHB Research - 18 Apr 2024