KUALA LUMPUR (Jan 27): IGB Real Estate Investment Trust's (REIT) results for the financial year ended Dec 31, 2021 (FY21), which were deemed broadly in line, have set the base for a recovery, according to analysts.
However, some remain sceptical and have cut their earnings forecasts for the REIT to reflect lower rental reversion.
CGS-CIMB analyst Sharizan Rosely said in a note that IGB REIT’s FY21 core net profit made up 101% of his and 102% of consensus full-year forecasts.
“The performance was broadly in line, with the fourth quarter of financial year 2021 (4QFY21) exhibiting a strong quarter-on-quarter recovery, setting the base for improvements in operating conditions in the coming quarters,” he said.
With the overall retail sector set on a recovery path in FY22, he sees minimal risks of rental assistance as he understands retail footfall and tenant sales as at end-2021 have recovered close to pre-pandemic levels.
According to him, the indicative of easing rental assistance/rebates was 4QFY21’s net profit income (NPI) margin of 78%, being the group’s highest quarterly NPI margin achieved since the pandemic began in the first quarter of 2020 (1Q20).
As for the retail assets, he said Mid Valley Megamall (MVM) and The Gardens Mall closed FY21 with high occupancy rates of 99.8% (FY20: 99.7%) and 99.5% (FY20: 96%) respectively, higher than the retail sector’s end-2021 average occupancy rate of 72% (according to JLW Research).
While the emergence of the Omicron Covid-19 variant is a concern, he remains optimistic of a retail space recovery in FY22, with MVM and The Gardens Mall potentially emerging as among the biggest beneficiaries.
“We expect rental reversion to stay in the slight negative territory in FY22 (FY21: average single-digit negative) as tenant retention is the top priority. In terms of FY22 lease expiry profile, 24%/45.4% of MVM’s/The Garden’s NLA are due for renewal,” he said.
He cuts IGB REIT FY22 to FY23 earnings per share (EPS)/distribution per unit (DPU) by 0.4% to 3% on housekeeping.
He also forecast IGB REIT FY22 EPS/DPU growth of 28.3% year-on-year, reflecting the REIT’s low base, post-pandemic recovery trajectory.
He retains an "add" call rating on IGB REIT and target price of RM1.88, backed by dividend yields of 4.9% to 5.9%.
“IGB REITs flagship malls’ strong neighbourhood appeal make them well-positioned for a robust recovery — a key medium-term potential share price catalyst,” he said.
In a separate note, UOB KayHian analyst Yap Xiu Li said IGB REIT’s results were within expectations, with its 4QFY21 performance improving on the back of a recovery in footfall traffic and the reversal of impairment.
“2022 should be the year of normalisation primarily based on broader vaccine coverage, provided that any new Covid-19 variants are not deadly,” she said.
Yap still likes IGB REIT over other retail REITs for its resilient assets and faster-than-peers’ recovery pace.
She maintained a "buy" on IGB REIT with a target price of RM1.90 and said the REIT still offers decent yields of at least 5% from 2022 onwards.
Her projected IGB REIT 2022 earnings growth of 55% year-on-year is based on flat rental reversion, and minimal rental assistance.
While CGS-CIMB and UOB KayHian are positive on the outlook of IGB REIT, AmInvestment Bank has downgraded its recommendation on IGB REIT to "hold" from "buy" with a lower fair value to RM1.65 (from RM1.85 previously).
“Our valuation for IGB REIT is based on a target distribution yield of 5% over a lower FY23F distribution income,” it said.
The research house also cuts IGB REIT distribution income forecasts for FY22 to FY24 by 13%, 4%, and 1% to RM240 million, RM317 million and RM343 million respectively (from RM276 million, RM329 million and RM340 million).
“This is after factoring in a lower rental reversion amid the continued challenging operating environment in retail malls as some tenants still require rental assistance in the near term,” it said.
It said it has turned cautious on IGB REIT's outlook in FY22 due to:
- the rental reversion rate that is unlikely to recover to the pre-pandemic level in FY22 and will turn slightly negative in order to retain good tenants
- some tenants that will still require assistance in the form of rental rebates in the near term
- higher borrowing cost due to potential hikes in interest rates, and
- narrowing yield spread between IGB REIT and the 10-year Malaysian Government Securities (MGS).
IGB REIT said Wednesday that it has posted an NPI of RM93.66 million for its 4QFY21, a marginal improvement of 0.6% from RM93.09 million in the previous year, amid reversal for impairment of trade receivables.
It has also approved a DPU of 2.17 sen.
Its NPI for FY21, however, fell 13.13% to RM275.1 million from RM316.68 million a year ago.
At the time of writing, IGB REIT rose one sen or 0.65% to RM1.54, valuing the group at RM5.5 billion.