Appealing Yields With A Favourable Risk-Reward Balance
In anticipation of a market consolidation, IGB REIT offers a favourable risk-reward
balance. The stock should appeal to investors with its earnings recovery trajectory in
addition to its share price still hovering at the pandemic trough. We like IGB REIT for its
resilient assets and faster-than-peers’ recovery pace. The REIT still offers attractive
yields of at least 5.6% from 2022 onwards. Maintain BUY and target price of RM1.90.
WHAT’S NEW
• High yielders should outperform in anticipation of market consolidation. The
FBMKLCI’s near-term outlook may be affected by the anticipated US equity consolidation
amid the tightening US monetary policy. High-yield stocks would appeal and should
outperform. With earnings to recover 54% for 2022 (-2.4% vs 2019), coupled with attractive
yields of 5.6-6.0% for 2022-23, IGB REIT should re-rate as share price is still depressed
since the pandemic. The earnings growth is mainly on the back of reduced rental assistance,
further boosted by the economic and border reopening. Moreover, we are expecting 1Q22
results to be similar to 4Q21 as consumer sentiment was spurred by the Lunar New Year
festivities.
• Interest rate hike priced in. We think most of the negative impact (from the interest rate
hike and lingering COVID-19 aftereffects) has been priced in as IGB REIT’s yield spread to
10-year Malaysia Government Securities (MGS) widened to 2.8ppt, above the spread during
the last overnight policy rate hike in 2018 (spread of 2.2ppt), before narrowing to 2ppt
currently. Even with the imminent interest rate hikes locally and internationally, the impact on
IGB REIT should be manageable as its earnings recovery should overcome it. Additionally,
its gearing is the lowest among stocks under our coverage at 0.23x.
STOCK IMPACT
• Lower risk of rental assistance to tenants. The border reopening to travellers would
increase inbound and outbound tourism, which would in turn spur consumer sentiment.
Hence an increase in footfall traffic at malls translates to higher tenant sales. Rental
assistance to tenants would be substantially lower or none compared with previous years.
Having said that, revenue portion from tenant sales is about 10-15%.
• 4Q21 financial results an indication of “business-as-usual” operations. Tenant sales
for 4Q21 recovered at a higher pace than footfall in comparison to pre-COVID-19 levels,
which led to lower rental assistance provided. For 2021, net property income (NPI) margin
remained at 69%, still lower than pre-COVID-19 levels of 72%. Occupancy remained
resilient with Mid Valley and The Gardens both at 99%.
• To also benefit from the return of office crowds. Both Mid Valley Megamall and The
Gardens Mall would also benefit from the return of office crowds. The F&B segment and, to
some extent, the fashion segment would gain from the spillover of the office crowds. The
fashion and F&B segments make up about 43% and 31% of total portfolio NLA respectively.
• In a better position to weather uncertainties. We continue to like IGB REIT due to its lean
balance sheet with a low gearing level of 0.23x, which is still well below the 0.6x threshold
set by the Securities Commission (limit increased to 0.6x from 0.5x until Dec 22).
EARNINGS REVISION/RISK
• Maintain earnings forecasts. Our projected 2022 earnings growth of 54% yoy (-2% vs
2019) is based on: a) flat rental reversion, and b) minimal rental assistance.
VALUATION/RECOMMENDATION
• Maintain BUY and target price of RM1.90. We believe that IGB REIT’s quality assets will
allow it to experience faster earnings recovery compared with other retail REITs (as
observed during the RMCO). Our target price is based on a dividend discount model
(required rate of return: 6.8%, terminal growth: 1.8%), with an implied dividend yield of 4.5%.
Dividend yields of 5.6% and 5.9% for 2022 and 2023 respectively are decent in this current
environment.
• Forward yield spread with 10-year MGS is at +0.3SD, indicating that the current yield of 5-
6% has priced in the expectations of rising MGS. IGB REIT’s faster-than-peers’ recovery
pace would further boost earnings recovery and translate into higher dividends.
SHARE PRICE CATALYST/RISKS
• Faster-than-expected recovery in consumer spending, and higher-than-expected rental
reversions.
• Risk: Rising COVID-19 cases which could dampen sentiment.