IGB REIT’s 1Q20 core net profit of RM68.4m (-9.2% QoQ, -17.5% YoY) were below ours and consensus expectations. Dividend of 1.94 sen per unit was declared. The overall decline in 1Q20 was mainly due to rental support provided to tenants and lower car park income arising from the Covid-19 pandemic and MCO since 15th March. We cut earnings by -16.6%, -4.0%, and -3.8% for FY20-22 to account for lower sales turnover of rental income arising from profound negative repercussion of Covid-19 to the retail industry. Downgrade to HOLD (from Buy) with a lower TP of RM1.76 (from TP: RM1.83) as outlook for the retail industry remain grim. While we favour IGB REIT for its concentration of prime retail assets as well as its strong balance sheet, we reckon that its short-term earnings will likely be impacted due to lingering concern of Covid-19 and MCO translating to rental pressure of its retailers.

Below expectations. 1Q20 core net profit of RM68.4m (-9.2% QoQ, -17.5% YoY) were below ours and consensus expectations, accounting for 24% and 22%, respectively. Although 1Q formed 24% of our full year forecast, we deem this to be below expectations given likely weaker 2Q earnings ahead to from roughly 1-month impact of the Movement Control Order (MCO).

Dividend. Declared 1Q20 DPU of 1.94 sen per unit, going ex on the 6th May 2020 (1Q19: 2.40 sen).

QoQ. Top-line growth dropped by 10.5% to RM125m, bringing down net property income (NPI) by 8.0%; this was due to rental support provided to tenants and lower car park income arising from the Covid-19 pandemic and MCO since 15th March. As a result, core net profit decreased by 9.2% to RM68.4m.

YoY. Revenue was lower by 11.5% against the corresponding 1Q19 due to rental support provided to tenants and lower car park income. In turn, core net profit reduced by 17.5% as operating expenses stayed flat (-3%).

Stable high occupancy. Both properties; Mid Valley Megamall and The Gardens Mall continue to operate with high occupancy rates of close to 100%, thanks to its strategic prime location.

Outlook. Covid-19 and MCO has indeed hurt the retail industry and IGBREIT is no exception. Retail Group Malaysia has estimated that shopper traffic will decline as much as 50% due to Covid-19 and MCO. While management has not ruled out any possibility of rental rebates, IGBREIT has granted rental assistance to tenants affected by MCO to make it affordable for them to continue paying rent. Nonetheless, we remain watchful of FY20 earnings given unprecedented challenges of Covid-19 along with the MCO placing a dent on the economy which has impaired consumer sentiment and the overall retail industry.

Forecast. We cut our earnings by -16.6%, -4.0%, and -3.8% for FY20-22 to account for lower sales turnover of rental income arising from the profound negative repercussion of Covid-19 to the retail industry.

Downgrade to HOLD (from Buy) with a lower TP of RM1.76 (from RM1.83). We downgrade the stock to HOLD, as outlook for retail industry remains unexciting in near term. To note, our TP is pegged on FY21f DPU on targeted yield of 5.1%, which is derived from 2-year historical average yield spread between IGB REIT and 10-year MGS yield. While we favour IGB REIT for its concentration of prime retail assets as well as its strong balance sheet, we reckon that its short-term earnings will likely be impacted due to lingering concern of Covid-19 and MCO arising from rental pressure of its retailers.

Source: Hong Leong Investment Bank Research - 23 Apr 2020