This article first appeared in The Edge Financial Daily, on April 28, 2016.

IGB Real Estate Investment Trust
(April 27, RM1.51)
Maintain buy with an unchanged target price of RM1.60: IGB Real Estate Investment Trust’s (IGB REIT) first quarter ended March 31, 2016 (1QFY16) realised net profit of RM72.8 million (+4.2% year-on-year [y-o-y]) was in line with our expectations (accounting for 24.8% of Affin Hwang Capital’s FY16 estimates) and within consensus estimates. The key drivers are primarily revenue growth (+4.6% y-o-y) on the back of a stronger rental income (+4.8% y-o-y) and other income growth (+4.0% y-o-y), subsequent to renewals at Mid Valley Megamall (which is staggered at an average of 33% of net lettable area each year) and higher turnover sales (given the festive season in February 2016). This resulted in a 4% y-o-y expansion in net property income. Quarter-on-quarter (q-o-q), realised net profit was up 37% q-o-q due to higher revenue, lower overheads as well as a dip in interest expense. No distribution per unit was proposed in 1QFY16 (1QFY15: Nil).

We maintain a “buy” on IGB REIT with a discounted dividend model-derived 12-month TP of RM1.60 based on the following underlying unchanged assumptions: 8.2% cost of equity, 6% equity risk premium and a 3% terminal growth rate. Despite the country’s overall weaker consumer sentiment, we continue to like IGB REIT due to occupancy rates consistently at 100% even during challenging economic times, efficient cost management initiatives, and both Mid Valley Megamall and The Gardens Mall being key suburban shopping destinations. In 2016, approximately 45% of The Gardens Mall will be up for renewal and therefore will be another boost to IGB REIT’s portfolio rental reversion in 2016. Longer-term key catalysts include asset injections, such as the Southkey Megamall and 18@Medini post-2020. Key risks include a slowdown in consumer spending, competition from new supply of retail space (2016 to 2018) and higher debt-refinancing rates. — Affin Hwang Capital, April 27