IGBREIT's FY23 results met expectations. We continue to expect sustainable earnings in its portfolio amid economic challenges and the introduction of new retail malls in Klang Valley. We maintain our MARKET PERFORM call with a higher TP of RM1.68 (from RM1.66) as we roll our valuation base to FY25F.

Within expectations. IGBREIT’s FY23 core net profit of RM359.1m made up of 99% of both our full-year forecast and the full-year consensus estimates. The final distribution per unit is also within our expectations at 2.70 sen (YTD 10.47 sen), that met our full-year expectation of 10.5 sen.

YoY, its FY23 revenue rose by 9%, primarily driven by stronger rental income with occupancy rates of 100% in both Mid Valley Megamall and The Gardens Mall during 4QFY23. This supported net property margins to 72.7% (+1.7ppt). The year reported revaluation gains of RM158.6m from both malls, leading to FY23 net profit to rise by 31% to RM517.6m. After adjusting for the above-mentioned fair value gains, core net profit and distributable income would stand at RM359.1m (+7%) and RM385.8m (+7%), respectively.

QoQ, 4QFY23 revenue increased by 6% from the same better rental rates mentioned above. Due to a significant portion of its fair value gains being reported in 3QFY23, this led to a 64% disparity in pretax profits. That said, adjusting for this would translate to a core net profit of RM92.9m (+5%).

Outlook. Consumer spending could be impacted by increased living costs, while retailers may grapple with maintaining profitability amid rising labour and utility expenses. Notably, both of the group’s malls target the mid-to-higher income demographic, and the stability of the higher income bracket is anticipated to be relatively unaffected. Therefore, despite a challenging economic outlook and a high-inflation environment, including the introduction of new retail malls in Klang Valley, we are confident that IGBREIT is well-positioned to maintain a stable earnings pattern moving forward. Additionally, the enhancement of a previous anchor tenant’s space could soon be commercially ready, driving more traffic and tenants there.

Forecasts. Our FY24F earnings remain mostly unchanged. Meanwhile, we introduce our FY25F earnings.

Maintain MARKET PERFORM with a higher TP of RM1.68 (from RM1.66). Against an unchanged target yield of 6.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%), we roll over our valuation base year to FY25F with 10.9 sen distribution per unit. This considers IGBREIT’s strong asset portfolio, evident in its high occupancy rates. However, this is likely already reflected into its share price given the recent interest in the stock even in the face of inflationary challenges. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) bond yield expansion, (ii) higher/lowerthan-expected rental reversions, (iii) lower-than-expected occupancy rates, and (iv) loss of footfall to new malls.

Source: Kenanga Research - 31 Jan 2024