HLIB Research expects slow recovery in 2H20 for IGB REIT

TheEdge Tue, Jul 21, 2020 11:19am - 3 years View Original


KUALA LUMPUR (July 21): Hong Leong Investment Bank (HLIB) Research has maintained its "hold" rating for IGB Real Estate Investment Trust (REIT) at RM1.80 with a lower target price (TP) of RM1.62 from RM1.76.

In a note today, HLIB Research analyst Nazira Abdullah said while she favours IGB REIT for its concentration of prime retail assets as well as its strong balance sheet, its short-term earnings will likely be impacted due to lingering concern of Covid-19 and the movement control order (MCO), conditional-MCO and recovery phase-MCO arising from rental pressure of its retailers.

IGB REIT reported a core net profit of RM19.5 million for the second quarter of 2020 (2Q20), indicating declines of 71.5% quarter-on-quarter (q-o-q) and 75% year-on-year (y-o-y) bringing 1H20 core net profit to RM87.9 million, a 45.4% drop y-o-y from RM160.8 million in 1H19.

Revenue for 1H20 of RM187 million decreased by 32.3% from RM276.2 million in the corresponding period of 1H19.

“The results were below ours and consensus expectations accounting for 35 to 36% respectively.

"While poor 2Q20 results were expected, it came below estimates due to the lower-than-expected rental income arising from rental assistance to its tenants, and our expectation of a slower recovery in 2H as some of the rental assistance is being extended to 3Q20” she added.  

IGB REIT declared an income distribution of 62 sen per unit for 2Q20, lower than the RM2.26 for 2Q19.

“Covid-19 and MCO, CMCO, RMCO have indeed paralysed mall operations. IGB REIT has taken an appropriate and targeted action plan including conditional rental support to eligible tenants, on a case-to-case basis, to mitigate the current challenges faced by their tenants.

“We expect a slow rebound in 3Q20 as management shared that some rental assistance are being extended into 3Q20 to eligible tenants (tenants that haven’t open yet during the CMCO and RMCO), and they are hopeful that none will be given in 4Q20, hence suggesting a slow recovery in 2H20” she added.

Nazira said while HLIB Research sees a resumption in footfall in the malls during the loosening of the MCO, it remains uncertain during this unprecedented time with higher unemployment leading to consumers becoming more watchful with their spending.

As a result, the research house cut its earnings forecast by 17% in FY20 and 8% in FY21 to FY22 to account for lower rental income.

The lowered TP is pegged on FY21 dividend per unit on targeted yield of 5.1% which is derived from 2-year historical average yield spread between IGB REIT and 10-year Malaysian Government Securities (MGS) yield.

At 10.03am, IGB REIT remained at RM1.80, with a market capitalisation of RM6.4 billion. The stock saw some 169,700 units traded. 

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