Robust outlook for IGB-REIT

PETALING JAYA: IGB Real Estate Investment Trust’s (IGB-REIT) outlook remains robust despite a slowdown in earnings growth in the second quarter ended June 30, 2023 (2Q23).

Analysts are optimistic of the fund’s ability to register income resilience over the medium term, backed by its good asset quality, amid an improving economic environment.

RHB Research, for instance, saw IGB-REIT as a proxy to the recovering domestic economy due to its fully tenanted assets and higher-than-average proportion of turnover rent.

“We think that IGB-REIT will continue to benefit from the resilient domestic economy. All of the REIT’s borrowings are also on a fixed rate of 4.49%, which has protected it from the increase in interest rates over the past year,” the brokerage wrote in its report.

“The country’s easing inflationary pressure, and improving labour market are positives for the retail market, but we are keeping an eye out on details of the proposed luxury tax and how it might impact retail sales,” it added.

RHB Research maintained its “buy” call on IGB-REIT, with an unchanged target price (TP) of RM1.91.

“For 2023, there are no concerns on non-renewals with management already focused on renewing leases that are expiring in early 2024, and both malls remain essentially fully occupied,” it said.

IGB-REIT’s 2Q23 net profit came in 3% year-on-year (y-o-y) lower at RM81mil on higher utility expenses, despite a 5.8% y-o-y increase in revenue to RM141.5mil, lifted by higher rental income. Cumulatively, its net profit rose 4.9% y-o-y to RM177.2mil in the first six months of 2023, as revenue rose 10.7% y-o-y to RM296.2mil due to the higher rental income.

The results were largely in line with market expectations.

Hong Leong Investment Bank (HLIB) Research said it continued to like IGB-REIT due to the fund’s prime asset location, robust occupancy rates and monthly rental income that exceeded pre-pandemic levels.

The brokerage recommended “buy” on IGB-REIT, with an unchanged TP of RM1.88.

“Despite a slight slowdown in 2Q23 compared to the preceding quarter due to high base effect, we think IGB-REIT will continue to demonstrate resilience for the remainder of 2023, on the back of strong labour market, coupled with promising rental reversion outlook for Midvalley Megamall and The Gardens Mall,” HLIB Research explained.

“We expect its performance to pick up again in 4Q23, underpinned by year-end holidays and festivals,” it added.

According to Kenanga Research, IGB-REIT’s portfolio would remain resilient, with near complete tenancy ratio and premium assets likely to overcome near-term headwinds in consumer spending.

“Spending in the consumer retail space could be challenged by inflationary and foreign exchange pressures, which could undermine disposable income. That said, higher income bracket groups may be somewhat unhindered given their greater level of financial security,” it said.

“IGB-REIT’s assets will likely continue to be preferred locations for such crowd while being decentralised from the busier hubs in Kuala Lumpur,” it added.

Kenanga Research retained its “outperform” call on IGB-REIT, with an unchanged TP of RM1.80.

Meanwhile, Maybank Investment Bank (Maybank IB) Research recommended a “hold” call on IGB-REIT, with the TP unchanged at RM1.70.

The brokerage said IGB-REIT could re-rate once there was better visibility on its asset pipeline.

“We remain positive on IGB-REIT’s near-term outlook where organic growth would be sustained by its two key malls’ prominent location with high shopper traffic. This, in turn, would sustain rental rates and high demand for its retail space,” Maybank IB Research said.

On new assets, the brokerage expected IGB-REIT’s next asset purchase to be the Mid Valley Southkey Mall in Johor Baru, which was opened in April 2019.

However, it said the acquisition would unlikely to happen anytime soon as the fund waited for the improvement in Singaporean traffic or footfall.

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