IGB REIT : Weaker margins at key assets (DBSV)

KLCI : 1,795.08
Price Target : 12-Month RM 1.40
Weaker margins at key assets

• 1H13 net profit was within our and consensus estimates; higher revenues were diluted by weaker NPI margins
• Declared 3.43 sen DPU, implying 100% payout of 1H13 distributable income
• Gardens Mall to remain revenue growth driver; still see limited asset acquisition opportunities
• Maintain HOLD with RM1.40 TP

1H13 earnings within expectations. 2Q13 net profit of RM51m was 3% higher q-o-q driven by higher revenue (+6%), but the impact was partly offset by higher operating expenses (+13%). The REIT’s revenue growth (higher percentage rent) was driven 
by rental income from Gardens Mall which grew 15% qo- q to RM34m, while Mid Valley contribution only inched up 2% to RM73m due to its higher revenue and rental base. 1H13 net profit is c.50% of our and market forecasts. Weaker margins capped Mid Valley NPI. Net property income (NPI) margin slid 2.3ppt to 65.9% from 68.2% in 2Q13 as a result of higher expenses at both Mid Valley Megamall and Gardens Mall (NPI margin decline of 1.8ppt each q-o-q). Utilities and other operating expenses (upgrade expenses and property management reimbursements) drove up costs.

Our View
Under-rented Gardens Mall. Gardens Mall will be the key earnings growth driver for IGB REIT due to its lower rental base than Mid Valley Megamall and 53% of its NLA expiring in 2013. Its current rental rates are estimated to be below RM10psf, a large discount to average rents at Pavilion KL (RM19psf) and Suria KLCC (RM22-25psf), despite its prime location. However, cash flow will remain stable, supported by Mid Valley Megamall contribution.

Maintain HOLD. IGB REIT lacks near-term catalysts because it does not have an attractive retail asset pipeline from its sponsor IGB Corp (comprises offices and hotel properties). In spite of low gearing of 25%, third party acquisitions would be challenging because of excessive valuations. The planned construction of Southkey Megamall in Johor is also expected to be a long-term play. Our price target is currently under review with potential downward bias.

Source: DBS Vickers Research 
Publish date: 31/07/13