IGBREIT's 1HFY24 results and distribution beat expectations due to stronger-than-expected rental reversions, which also drove an 8% YoY growth in its core net profit. Mid Valley Megamall is returning to full occupancy with new tenants taking up the floor space vacated by Metrojaya. We raise our FY24F-25F earnings forecasts by 3% and 15%, respectively, lift our TP by 5% to RM1.77 (from RM1.68) and maintain our MARKET PERFORM call.

IGBREIT’s 1HFY24 core net profit of RM190.5m made up 51% of both our full-year forecast and full-year consensus estimate. However, we consider the results above expectations as we expect a stronger 2H when the floor space in Mid Valley Megamall under reconfiguration comes back online. The variance against our forecast came largely from better-than-expected rental reversions.

It announced a net distribution of 2.31 sen, bringing its YTD net distribution of 4.98 sen DPU. This is on track to beat our full-year forecast of 9.72 sen.

YoY, its 1HFY24 revenue and core net profit grew by 6% and 8%, respectively, mainly driven by higher rental incomes from positive reversions with The Gardens Mall achieving occupancy close to 100% while that of Mid Valley Megamall was returning to close to full occupancy.

QoQ, its 2QFY24 topline fell 8% due to the high base from seasonally strong 1Q. Its core earnings dropped by a steeper 14% on a higher reimbursement cost.

Outlook. The retail malls under IGBREIT will continue to be buoyed by their wide range of tenants that cater to various income level groups and international tourists. As mentioned, the occupancy at Mid Valley Megamall is returning to close to 100% following the recent completion of floor space previously occupied by Metrojaya. We understand that it has secured higher-yielding new tenants for the floor space. On the other hand, we continue to remain cautious on retail sales due to sustained elevated inflation and the impending RON95 subsidy rationalisation that will further hurt consumer spending, partially cushioned by the return of international tourists.

Forecasts. We raise our FY24-25F earnings forecasts by 3% and 15%, respectively, to reflect better rental reversions.

Valuations. Consequently, we raise our TP by 5% to RM1.77 (from RM1.68) based on an unchanged target yield of 6.5% (derived from a 2.5% yield spread above our 10-year MGS assumption of 4.0%). There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like IGBREIT for its resilient portfolio, evident from its high occupancy rates and ability to cater to a wide range of income groups and international tourists. Maintain MARKET PERFORM.

Risks to our call include: (i) a higher risk-free rate, (ii) lower-than- expected rental reversions, (iii) lower-than-expected occupancy rates, and (iv) loss of footfall to new malls.

Source: Kenanga Research - 26 Jul 2024