• IGB REIT (IGBREIT) reported a disappointing set of results – 2Q20 realised net profit fell by 71.5% qoq to RM19.5m on sharp decline in rental

• The Results Were Below Market and Our Expectations

• In view of the higher and longer-than-expected rental assistance plan and challenging business outlook, we cut our 2020-22E earnings by 3-27%. Reaffirm HOLD rating with a lower target price (TP) of RM1.71

Lower 2Q20 realised net profit of RM20m (-72% yoy) due to rental support provided to tenants affected by Covid-19 / MCO

IGBREIT’s 2Q20 realised net profit fell by 71.5% qoq to RM19.5m on the back of lower revenue of RM62m (-50.4% qoq) and lower NPI margin of 60.3% (-10.4 ppt). The decline in revenue was due to high rental support provided to tenants affected by the Covid-19 pandemic and/or the government’s Movement Control Order (MCO), as well as lower car park income. Elsewhere, IGBREIT’s 2Q20 operating expenditure (opex) fell by 32.8% qoq to RM24.6m on lower utilities expenses. Tracking the lower earnings, IGBREIT declared a lower 2Q20 DPU of 0.62 sen (2Q19: 2.26 sen). Its 2Q20 payout ratio of 91.4% is below the 95% in prior quarters.

Weaker 6M20 Hit by Rental Assistance Programme

Similarly, IGBREIT’s 6M20 revenue fell by 32.3% yoy to RM187m while its NPI margin fell 5.9 ppt to 67.3% due to the full impact of its rental assistance programme. Overall, the earnings were below expectations, making up 35% of the street and 36% of our fullyear earnings forecasts due to the higher-than-expected amount of rental assistance provided.

Expecting Weak Recovery in 2H20

While the footfall at its malls has increased during the RMCO period, it was not as busy as our prior expectations. We observe that consumers are still wary of visiting crowded areas and are prudent on their spending.

Cutting 2020-22E earnings by 3-27%, maintain HOLD with a lower TP of RM1.71

We cut our 2020-22E EPU forecasts by 27.2%/12.3%/2.6% after incorporating the higher and longer rental support programme for FY20 and slower earnings recovery in FY21E-22E. In tandem, we lower our DDM-derived price target to RM1.71. Maintain HOLD. Downside risks to our HOLD rating are prolonged need for rental assistance and second wave of Covid-19 while upside risk is strong pent-up demand that pushes retail sales.

Source: Affin Hwang Research - 21 Jul 2020