KUALA LUMPUR (July 21): Hong Leong Investment Bank (HLIB) Research has maintained its "hold" rating for IGB Real Estate Investment Trust (REIT) at RM1.80 with a lower target price (TP) of RM1.62 from RM1.76.

In a note today, HLIB Research analyst Nazira Abdullah said while she favours IGB REIT for its concentration on prime retail assets as well as its strong balance sheet, its short-term earnings will likely be impacted due to lingering concerns over Covid-19 as well as the movement control order (MCO), conditional MCO (CMCO) and recovery MCO (RMCO) arising from rental pressure on its retailers.

IGB REIT reported a core net profit of RM19.5 million for the second quarter ended June 30, 2020 (2QFY20), indicating declines of 71.5% quarter-on-quarter (q-o-q) and 75% year-on-year (y-o-y), bringing first-half (1HFY20) core net profit to RM87.9 million, a 45.4% drop y-o-y from RM160.8 million for 1HFY19.

Revenue for 1HFY20 of RM187 million was a decrease of 32.3% from RM276.2 million for 1HFY19.

“The results were below our and consensus expectations, accounting for 35 to 36% respectively.

"While poor 2QFY20 results were expected, it came below estimates due to lower-than-expected rental income arising from rental assistance to its tenants — and our expectations of a slower recovery in 2HFY20 as some of the rental assistance is being extended into 3QFY20,” she added.

IGB REIT declared an income distribution of 62 sen per unit for 2QFY20, lower than the RM2.26 for 2QFY19.

“Covid-19 and the MCO, CMCO and RMCO have indeed paralysed mall operations. IGB REIT has taken an appropriate and targeted action plan, including conditional rental support to eligible tenants, on a case-by-case basis, to mitigate current challenges faced by its tenants.

“We expect a slow rebound in 3QFY20 as management has shared that some rental assistance is being extended into 3QFY20 to eligible tenants (tenants that did not open during the CMCO and RMCO periods), and they are hopeful that none will be given in 4QFY20, hence suggesting a slow recovery in 2HFY20,” she added.

Nazira said while HLIB Research sees a resumption of footfall in the malls due to the loosening of the MCO, it remains uncertain during these unprecedented times with higher unemployment leading to consumers becoming more cautious about their spending.

As a result, the research house cut its earnings forecasts by 17% for FY20 and 8% for FY21 to FY22 to account for lower rental income.

The lower TP is pegged at FY21 dividend per unit on a targeted yield of 5.1% derived from the two-year historical average yield spread between IGB REIT and 10-year Malaysian Government Securities' (MGS) yield.

At 10.03am, IGB REIT remained at RM1.80, with a market capitalisation of RM6.4 billion. The stock saw some 169,700 units traded.