IGB REIT - Banking On Its Mega Size
IGB REIT -
Price Target : 1.43
Last Price : 1.39
Banking On Its Mega Size
Fair Value : RM1.43 | Recom : Outperform
Overtaking Pavilion REIT as largest pure-retail REIT. IGB REIT will be the second-largest REIT in Malaysia in terms of market cap and asset size, slightly behind Sunway REIT. However, with its two assets – Mid Valley Megamall (worth RM3.44bn) and The Gardens Mall (RM1.16bn), IGB REIT will be the largest pure retail REIT thus far, ahead of Pavilion REIT and SunREIT.
Future growth driver – The Gardens Mall (TGM). TGM is the relatively younger sister to Mid Valley Megamall (MVM) and is interconnected with MVM. It opened its doors in 2007, and has a total NLA of 817k sqf as at 31 May. TGM was designed to complement MVM, and is positioned to cater towards the higher-end market segment.
Since 2009, average occupancy rate for TGM has consistently been above 96% and currently operates at near-full capacity. Average rental rate is at RM8.74 psf as at 31 May. TGM currently contributes about 30% to IGB REIT’s topline. We believe that TGM will be the main driver for IGB REIT’s EPU and DPU growth over the next few years, given that it is a high-end mall and is still in the early stages of its rental cycle as compared to the more matured MVM. About 54% of TGM’s NLA is due to expire next year. We expect a 10-15% growth from here, narrowing the rental gap between TGM and MVM.
Other growth prospects. Other factors that could potentially drive IGB REIT’s growth going forward include: 1) Strength of the management team; 2) Proactive asset enhancement initiatives; 3) Potential development of the surrounding areas; and 4) Resilient consumer spending buoying retail sales.
Risks and concerns. These include: 1) Lack of pipeline assets; and 2) Competition from other malls.
Earnings outlook. On the back of our rental growth assumption of 5-6% p.a. for MVM and 7-9% p.a. for TGM, our EPU and DPU projections are slightly higher than the prospectus forecasts, as the latter’s assumptions could be conservative, based on KrisAssets’ track record. Our estimated EPU growth of about 6-7% p.a. for IGB REIT is comparable to other retail REIT peers. Based on a payout of 100% for FY12-14, this translates into net yields of 4.6-5.2%.
Initiating coverage with an Outperform recommendation. We value IGB REIT at RM1.43, with a cost of equity assumption of 7% on our DDM valuations. Our fair value implies a P/NAV ratio of 1.43x and 4.3% net yield for FY13, which we believe is fair, given that: 1) its peers such as Pavilion REIT, CMMT and Sunway REIT currently trade at a P/NAV of 1.29-1.45x; and 2) the current average FY13 net yield of 4.6% for the top three MREITs. Overall, we are positive on IGB REIT due to: 1) its well-known assets; 2) the significant growth prospects for TGM; and 3) its strong management team.
Source: RHB Research - 21 Sep 2012