AFFIN Hwang Capital Research has maintained its buy rating on IGB Real Estate Investment Trust (IGB REIT) with an unchanged dividend discount model (DDM)-derived price target of RM2.15.

In a note on Dec 12, the research house said: “We like IGB REIT for its first-class assets, strong management and robust balance sheet. Moving into 2020, we expect the REIT to extend its uninterrupted revenue and net property income (NPI) growth, supported by high occupancy, rental growth and efficient cost management.”

The report said it is worth highlighting that Mid Valley Megamall has achieved the highest organic NPI growth among its peers during the 2014-2018 period.

“We expect Malaysian REITs to remain in demand in 2020. Taking a cue from the compressed 10-year Malaysian Government Securities (MGS) yield and a possible cut in Overnight Policy Rate (OPR), we anticipate strong investor demand to further re-rate the high-quality MREITs, including IGB REIT. With a 5.1% 2020E yield, the valuation looks attractive.”

A consistent performer

Listed in September 2012, IGB REIT has grown from strength to strength and fended off numerous challenges such as rising competition from new retail shopping malls/e-commerce and slowing economic/retail sales growth.

The REIT has reported uninterrupted revenue and NPI growth since listing, attributable to its ever-popular shopping malls (Mid Valley Megamall and The Gardens Mall) and proactive management.

Notably, Mid Valley Megamall has outperformed its listed peers, delivering the highest NPI growth of 28% over the years 2014 to 2018. Meanwhile, The Gardens Mall is one of the top performers among the high-end shopping malls.

“We expect annual earnings per unit (EPU) growth of 3-4%. Looking ahead, we are positive on IGB REIT’s earnings outlook. Despite the soft consumer sentiment, its tenants’ sales are still seeing robust growth, which should translate to a higher turnover rent in 2019-20E.

“Also, IGB REIT’s ongoing asset enhancement initiatives and tenant management should drive revenue and NPI growth. All in, we forecast IGB REIT to grow its EPU by 3-4% per annum in 2019-21E.”

Moving into 2020

The research house expects defensive assets to remain in vogue and has maintained its overweight rating on MREITs.

“The OPR in 1H2020, we anticipate strong investor demand to further re-rate the high-quality MREITs. Historically, MREITs’ distribution yield has been positively correlated to the 10-year MGS yield.

“Under the current market conditions (slowing economic growth, higher risk aversion and oversupply of properties), stock-picking is vital as those with prime assets in strategic locations and a good tenant mix are likely to vastly outperform their less-established peers,” it said in the report.

It said IGB REIT has been the research house’s top pick among the retail-MREITs.

“We like IGB REIT for its strategically located prime assets, stellar earnings track record, proactive management with innovative asset enhancement initiatives (AEI), efficient cost control and low gearing ratio, which provide ample debt headroom for earnings-accretive acquisitions,” the research house added.

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