This article first appeared in The Edge Financial Daily, on October 29, 2015.

IGB Real Estate Investment Trust
(Oct 28, RM1.30)
Upgrade to add with a higher target price (TP) of RM1.46: IGB Real Estate Investment Trust’s (IGB REIT) third quarter ended Sept 30, 2015 (3QFY15) core net profit increased 8.3% year-on-year (y-o-y) to RM65.1 million, on the back of a 7.5% y-o-y growth in revenue to RM121 million. On a cumulative basis, revenue increased 7.5% y-o-y to RM367.8 million, resulting in a core net profit growth of 13.9% y-o-y to RM200.9 million.

This exceeded expectations, making up 79% of our full-year forecast and 77% of consensus.

IGB REIT announced a distribution per unit (DPU) of 2.14 sen for 3QFY15. This brought its total DPU for the nine-month period ended Sept 30, 2015 (9MFY15) to 6.61 sen, which translates into a 12% y-o-y improvement and makes up 83.7% of our full-year DPU forecast of 7.9 sen.

For 3QFY15, IGB REIT’s gross revenue increased 7.5% y-o-y, mainly due to higher total rental income during the period. Net property income increased 6.4% y-o-y to RM85.2 million as its overall property operating expenses appreciated 10.4% y-o-y.

On a quarter-on-quarter (q-o-q) basis, IGB REIT’s gross revenue was 0.3% lower, mainly due to a lower percentage of rental income during the period, while net property income dropped 1.3% q-o-q, mainly due to a lower percentage of rental income and higher q-o-q operating expenses.

IGB REIT’s 9MFY15 gross revenue grew 7.5% y-o-y, mainly due to higher total rental income during the period, resulting in a 10.7% y-o-y jump in net property income to RM261.6 million. Property operating expenses recorded a 0.3% y-o-y increment. After adjusting for non-cash adjustments of RM28.9 million, IGB REIT’s distributable income for 9MFY15 grew 12.9% y-o-y to RM229.8 million.

We revise our FY15 to FY17 earnings forecasts upwards by 3% to 9.3% and DPU by 2.7% to 8.9%, on stronger rental revision assumptions and due to an additional 40,000 sq ft of net lettable area expected to be added in 2015 in Mid Valley Megamall from a reconfiguration of the existing layout.

We increase our dividend discount model-based TP and upgrade our call on IGB REIT to “add”, as we believe the current price weakness presents a buying opportunity for investors. Sustained strong earnings growth is a potential catalyst. — CIMB Research, Oct 28