IGB REIT’s 9M earnings driven by positive rental reversions

This article first appeared in The Edge Financial Daily, on October 27, 2016.


Maintain hold call with an unchanged target price of RM1.62: IGB Real Estate Investment Trust’s (IGB REIT) third quarter of financial year 2016 revenue and core net earnings grew 4.1% and 5.6% year-on-year (y-o-y) to RM125.9 million and RM68.8 million respectively. This brought its nine-month financial year ending 2016 (9MFY16) core earnings to RM207.5 million (+3.3% y-o-y), which was mainly driven by positive rental reversions, backed by sustained occupancy rates.

The group’s revenue growth was mainly driven by higher rental reversions from both Mid Valley Megamall and The Gardens Mall, which saw 28% and 44% of leases up for renewal this year, respectively. We understand that almost all of its tenants have already recommitted to leases, with average upward revisions in the mid-double digits. This further underscores the popularity of its highly sought-after malls, which have a long waiting list for retail space.

Given the lack of high-quality malls up for grabs in the market, IGB REIT does not see any viable third-party acquisitions transpiring in the near term. Thus, we do not see the group aggressively seeking to inject assets into its portfolio for now in spite of its lower-than-average gearing ratio of 0.24 times (versus industry’s average of 0.34 times). Additionally, we believe that the earliest potential timeline for the opening of Mid Valley Southkey Megamall is 2021; the group’s acquisition pipeline could stay rather dry for now.

We maintain our “hold” call on the stock as we believe that investors have already priced in the upside potential for its high-quality assets. The group’s organic growth will continue to be supported by healthy rental reversions and sustained occupancy rates for both of its anchor malls. Upside risks include stronger-than-expected consumer spending (about 12% to 13% of IGB REIT’s total revenue consists of turnover rents), while downside risks include increased competition from other malls. —CIMB Research, Oct 26