• Downgrade to NEUTRAL from Buy, with new DDM-derived MYR2.12 TP (from MYR2.03), 9% upside and c.6% yield. IGB REIT’s 1H24 results were in line with expectations, recording healthy YoY income growth from its positive rental reversions. 2H24 should also see higher rental rates from the completed reconfiguration works at Mid Valley Megamall (MVM). Following a strong share price performance over the past year, we downgrade our rating as we think the upside is limited at this juncture.

• Results in line. 2Q24 core profit of MYR88.2m (-13.9% QoQ, +8.9% YoY) brought 1H24 earnings to MYR190.9m (+7.6% YoY). This made up 50% of our and Street’s estimates. Revenue fell 8% QoQ from a seasonally slower quarter, but YoY revenue increased 6% from positive rental reversions. NPI margins remained stable in 1H24 at 74.8% (1H23: 74.7%) following the sharp increase in utility costs last year. The REIT declared a DPU of 2.56 sen (1H24: 5.52 sen, 1H23: 5.17 sen).

• Higher rental reversion overall. MVM’s occupancy rate returned to 100% from 89% in 1Q24 as it completed the reconfiguration of a space previously occupied by an anchor tenant. Its gross monthly rental income (including turnover rent) rose 18% to MYR19.13 psf. The Gardens Mall remains fully occupied, and recorded a more moderate 2% increase in rental income YoY to MYR15.55 psf.

• Outlook. Overall, management is guiding for mid-single digit rental reversions for FY24 to its base rent. We expect earnings to pick up sequentially following this slower quarter, especially as IGB REIT has a higher percentage of turnover rent compared to other REITs. As the reconfigured space will now host smaller specialty tenants, it should also see a boost in rental rates in 2H24. We do not foresee any significant downside risks as most of its footfall is made up of domestic shoppers. Meanwhile, utility rates have also eased slightly, and all of the REIT’s borrowings are on a fixed rate basis.

• Earnings estimates. We increase our FY24-26 earnings forecasts by 3% after raising our rental rate assumptions. Our TP incorporates a 0% ESG premium/discount based on our in-house methodology.

• Key risks to our call include stronger/slower-than expected economic performance, higher/lower-than-expected rental reversions, and lower occupancy rates.

Source: RHB Research - 26 Jul 2024