IGB Real Estate Investment Trust
(Jan 10, RM1.75)
Maintain buy with a higher target price (TP) of RM1.90: We maintain our “buy” call with new TP of RM1.90 from RM1.89, 10% upside plus 6% 2019 forecast yield after updating our cost of equity assumption. IGB Real Estate Investment Trust (REIT) remains one of our top picks for exposure to Malaysian REITs (MREITs). We believe the strong positioning of Mid Valley Megamall and The Gardens Mall will continue to drive performance this year.

 
Expect the overnight policy rate to be kept unchanged. Global growth has started to slow, while a protracted trade war between the US and China is likely to have an adverse impact on global trade. Under such circumstances, the US Federal Reserve (Fed) may be forced to slow down its pace of rate hikes this year, in our view. This has recently supported by the latest statement made by Fed chair Jerome Powell that the Fed will be more flexible on monetary policy and is in no rush to raise interest rates. As a result, the 10-year US bond yield was down by over 50 basis points from its peak in 2018. This should be positive for REITs, as slowing interest rate hikes are generally favourable for REITs, given widening spreads.

We understand that Mid Valley Megamall recently completed its asset enhancement initiative (AEI) at the end of last year, with minimal incremental increase in net lettable area (NLA) of below 10,000 sq ft. Meanwhile, the AEI at The Gardens Mall was completed in September 2018, involving the basement area. The AEI increased The Gardens Mall’s NLA by around 15,000 sq ft (less than 2% of The Gardens Mall’s NLA).

The pipeline asset for IGB REIT — Southkey Mid Valley Megamall — commenced operations in December 2018. We were informed previously that the occupancy rate has surpassed 80%. Having said that, the mall is unlikely to be injected anytime soon, as newer malls will take at least one rental cycle (three to four years) to stabilise.

We believe IGB REIT has relatively lower non-renewal and earnings downside risks among all MREITs, due to the positioning of both its malls. In addition, with increasing volatility in the market, IGB REIT’s dividend yield looks reasonably attractive. Downside risks to our call include prolonged weak domestic consumer sentiment. — RHB Research Institute, Jan 10