IGB REIT’s 1H20 core net profit of RM87.9m (-45.4% YoY) were below ours and consensus expectations. Dividend of 0.62 sen per unit was declared. Overall, the decline in 1H20 was mainly due to rental support provided to tenants and lower car park income arising from the Covid -19 pandemic and MCO/CMCO. We slashed our earnings by 17% in FY20 and 8% in FY21-22 to account for lower rental income arising from profound negative repercussion of Covid -19 to the retail industry. Maintain HOLD at a lower TP of RM1.62 (from RM1.76).

Below expectations. 2Q20 core net profit of RM19.5m (-71.5% QoQ, -75.0% YoY) brought 1H20 core net profit to RM87.9m (-45.4% YoY). The results were below ours and consensus expectations, accounting for 35-36%, respectively. While poor 2Q20 result was expected, it came below estimates due to the lower-than-expected rental income arising from rental assistance to its tenants, and our expectation of a slower recovery in 2H as some of the rental assistance are being extended to 3Q20.

Dividend. Declared 2Q20 DPU of 0.62 sen per unit (2Q19: 2.26 sen per unit), going ex on the 3rd August 2020.

QoQ. Top-line growth plummeted by 50.4% to RM62m, bringing down net property income (NPI) by 57.7%; this was due to rental support provided to tenants and lower car park income arising from the Covid-19 pandemic and MCO/CMCO/RMCO. As a result, core net profit plunged by 71.5% to RM19.5m.

YoY. Revenue dived by 54.1% against the corresponding 2Q19 due to rental support provided to tenants and lower car park income. In turn, core net profit tumbled by 75% in tandem with lower revenue.

YTD. Revenue for 1H20 of RM187.0m decreased by 32.3% from RM276.2m in corresponding period 1H19. Primarily, the fall was contributed by lower rental income resulting from rental support to their tenants and lower car park income during MCO/CMCO period. Subsequently, core net profit of RM87.9m showed a decrease of 45.4% from RM160.8m in 1H19.

Outlook. Covid-19 and MCO/CMCO/RMCO has indeed paralysed malls operation. IGBREIT has taken an appropriate and targeted action plans including conditional rental support to eligible tenants, on a case-to-case basis, to mitigate the current challenges faced by their tenants. We expect a slow rebound in 3Q20 as management shared that some rental assistance are being extended into 3Q20 to eligible tenants (tenants that haven’t open yet during CMCO/RMCO), and they are hopeful that none will be given in 4Q20, hence suggesting a slow recovery in 2H20. While we see a resumption of footfall in the malls during loosening of MCO, we remain concern on 2H20 earnings as recovery of consumer sentiments remain uncertain during this unprecedented time with the higher unemployment leading to consumers becoming more watchful with their spending.

Forecast. We cut our earnings forecast by 17% in FY20 and 8% in FY21-22 to account for lower rental income.

Maintain HOLD, TP: RM1.62. We maintain HOLD at a lower TP of RM1.62 (from RM1.76) 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/CMCO/RMCO arising from rental pressure of its retailers.

Source: Hong Leong Investment Bank Research - 21 Jul 2020