Investment Highlights

• We maintain BUY on IGB REIT with a higher fair value (FV) of RM1.98/unit (from RM1.95/unit previously) based on our revised dividend discount model (DDM) and a neutral 3-star ESG rating .

• The FV implies a FY24F distribution yield of 5.7%, at parity to its 5-year median.

• IGB REIT’s 1QFY24 distributable income of RM109mil was within expectations, accounting for 28% of our earlier forecast and 29% of street’s.

• On 26 March 2024, one of Mid Valley Megamall’s (MVM) anchor tenant, Metrojaya surrendered 200,403 sqft of its previously leased space for reconfiguration works.

• Hence, we lower our FY24F distributable income by 8% to incorporate the reconfiguration cost, which are estimated to range between RM25mil-RM35mil. We also take into account the estimated temporary rental loss of RM9mil, partially offset by a potential post-configuration rental increment of RM4mil.

• Meanwhile, we raise our FY25F/FY26F distributable income modestly by 1% to reflect the improvement in rental rate for the spaces previously leased by Metrojaya following the reconfiguration.

• In 1QFY24, IGB REIT’s gross revenue improved 5% YoY while net property income (NPI) climbed 6% YoY. The improvement was driven by stronger rental income from favourable FY23 rental reversions in MVM and The Gardens Mall (TGM) . Additionally, higher tenant sales in 1QFY24 increased the variable portion of rents tied to the level of retail store business transactions.

• On QoQ comparison, IGB REIT’s 1QFY24 gross revenue expanded 3% while NPI grew 8%. These were driven by higher gross monthly rental income in both MVM and TGM.

• To date, IGBREIT has completed the renewal of a majority of leases expiring in FY24 at a rate of 4%-6% (close to pre- pandemic levels), supported by an improvement in retail sales.

• Despite concerns regarding potential dilution of footfalls following the opening of Pavilion Damansara Heights and The Exchange TRX, we understand that footfall traffic in both MVM and TGM remained resilient in 1QFY24 at 3mil visitors per month, which is comparable to their foot traffic in 1QFY23.

• In 1QFY24, occupancy rate for TGM was nearly full at close to 100%. However, the occupancy in MVM fell to 88.6% in 1QFY24 from 99.9% in 4QFY23 . This decline was attributed to the surrender of 200,403 sq ft of space tenanted by one of its anchor tenants, Metrojaya on 26 March 2024. The surrendered space is currently undergoing reconfiguration works. IGB REIT plans to convert a portion of the previous Metrojaya-leased space into specialty stores which carry higher rental rates.

• As anchor tenants typically pay lower rental rates, we assume Metrojaya’s monthly rental rate to be high-single digit at RM9 psf. The reconfiguration is expected to complete by 3QFY24. The short-term impact of the 4-6 months rental loss to IGB REIT’s FY24F earnings is immaterial as it only accounts for 1.1%-1.7% of IGB REIT’s FY24 total revenue.

• Moreover, the higher rental rate for Metrojaya and specialty store post-configuration could partially mitigate the temporary rental loss caused by the 4-6 months of vacancy. Given MVM’s strategic location and relatively lower rental rate, we are confident that MVM’s occupancy rate will return to 100% after the reconfiguration.

• IGB REIT declared its gross distribution per unit (DPU) of 2.96 sen in 1QFY24. The 12-month trailing DPU of 10.6 sen represents a distribution yield of 6%.

• We like IGB REIT due to its resilient long-term outlook underpinned by the group’s strategically located assets in the heart of Klang Valley.

• IGB REIT offers a compelling FY25F distribution yield of 6.5% vs. 10-year MGS yield of 3.98%. IGB REIT’s distribution yield spread against 10-year MGS of 2.5% vs. a pre-pandemic (2017-2019) median of 1% is appealing to yield-seeking investors with its higher distribution spread against 10-year MGS .

Source: AmInvest Research - 18 Apr 2024