Malaysia IGB REIT The REIT-ail Giant

39 Pages·2012·1.34 MB·English

PP16832/01/2013 (031128) PP16832/01/2012 (029059)

Malaysia

Initiating Coverage
17 October 2012
17 October 2011

IGB REIT
Hold
(New)
The REIT-ail Giant

Share price: MYR1.39
Target price: MYR1.39 The rise of another giant REIT. We initiate coverage on IGB REIT
(New)
(IGBR) with a HOLD and a MYR1.39 DCF-based TP. IGBR provides

investors the exposure to the largest REIT by market capitalization and
Wong Wei Sum, CFA
2nd largest by free float in Malaysia. Growth will be underpinned by
[email protected]
organic growth in its existing retail assets - Mid Valley Megamall (MVM)
[phone]
and The Gardens Mall (GM).

Superior location draws crowd. Strategically located in the heart of

Mid Valley City and the fringe of Kuala Lumpur CBD, MVM and GM are

supported by offices and mature affluent townships within/surrounding

the Mid Valley City. Footfall of the two malls has been stable at around
34m p.a. despite rising competition from new malls. Its attractiveness
will be further enhanced by ongoing and future mixed developments in

the surrounding areas, which would further grow its catchment.
Stock Information
Description: The largest retail REIT in Malaysia by asset Benefits from improving connectivity and accessibility. IGBR is set
size. Listing with 2 initial assets – Mid Valley Megamall to benefit from the upcoming MRT Circle Line under the Greater
(MYR3.4b in asset size; 73% of 2011 proforma NPI) and the
KL/KV‟s integrated urban transportation system via a proposed linkage
Gardens Mall (MYR1.2b; 27%).
from Mid Valley City to KL Eco City‟s Komuter/LRT/MRT station. We
Ticker: IGBREIT MK believe that increased accessibility and connectivity will drive shopper
Shares Issued (m): 3,400.0
traffic further and this will in turn serve as a strong catalyst to IGBR‟s
Market Cap (MYR m): 4,726.0
3-mth Avg Daily Turnover (US$ m): 9.02 capital value and bargaining power for positive rental reversions.
KLCI: 1,653.52
Free float (%): 49% The perfect match. IGBR has a good combination of mature and
young assets - MVM anchors the earnings base while the relatively
Major Shareholders:
young GM provides significant room to grow average rental, which was
IGB Corporation 51%
19% below the MVM on a psf basis in 5M12. 18.5% of IGBR‟s rental
income is backed by long lease agreements whilst the portfolio tenancy
Key Indicators
expiry profile is well spread out, with 39% and 31% of the tenancies due
ROE – annualised (%) 6.1
for renewal in 2013 and 2014 respectively; provides income stability.
Net cash (MYR m): (1,155.4)
NTA/shr (MYR): 0.996 Fairly valued. Our TP translates to an implied yield of 5%, versus a

4.9% average for large cap retail REITs (4.8% for PavREIT and CMMT,

Historical Chart 5.3% for SunREIT). We like IGBR for its quality assets, earnings
resilience and liquidity. IGBR‟s relatively low 26% debt-to-asset ratio
1.43 IGBREIT MK Equity
allows it the capacity to borrow another MYR2.3b for asset acquisitions.
1.42
1.41 IGB REIT–Summary Earnings Table *Listed on 21 Sep 12 Source: Maybank KE
1.40
FYE Dec (MYR m) 4M2012F* 2013F 2014F
1.39 Total revenue 114.4 421.1 433.4
1.38 Net property income 77.5 287.4 295.6
1.37 Recurring Net Profit 54.0 204.3 211.9
1.36 Recurring Basic EPU (Sen) 1.6 6.0 6.2
1.35 EPU growth (%) - - 3.2
1.34 DPU (Sen) 1.8 7.0 6.8
Sep-12 Sep-12 Oct-12 Oct-12
PER^ -annualised 24.4 23.2 22.5
EV/EBITDA (x) 21.1 20.2 19.6
Div Yield (%) -annualised 4.8 5.0 4.9
Performance:
P/NAV(x) 1.4 1.4 1.4
52-week High/Low MYR1.44/MYR1.25

Gearing (%) 26.2 26.2 26.2
1-mth 3-mth 6-mth 1-yr YTD ROE (%) 5.7 6.0 6.2
ROA (%) 4.1 4.3 4.5
Absolute (%) - - - - -
Consensus Net Profit (MYR m) 184.4 198.8 216.1
Relative (%) - - - - -
IGB REIT 17 October 2011

Contents

Executive Summary P3
Key Investment Merits
Merit 1 : MYR4.6b assets dwarves all listed REITs P5
Merit 2 : Superior location draws crowd P6
Merit 3 : Perfect match provides earnings growth and stability P10
Merit 4 : Ample headroom to grow P14
Merit 5 : Strong management team P15
Merit 6 : Favourable macro fundamentals P16

Risks and Concerns P18

Financials P19
Valuations P20
Income Statement & Balance Sheet P22

Property Profile – Mid Valley Megamall P23
Property Profile – The Gardens Mall P25

Appendix 1 – IGB REIT’s structure
Appendix 2 – Who’s who in IGB REIT
Appendix 3 – Background of the Sponsor
Appendix 4 – Background of the Trustee
Appendix 5 – Fee structure of IGB REIT
Appendix 6 – Fee comparison among various M-REITs
Appendix 7 – Accolades / awards

Page 2 of 39
IGB REIT 17 October 2011

Executive Summary

Highly sought after retail assets. IGB REIT (IGBR) is the largest
domestic REIT by market capitalization at MYR4.7b and the 2nd largest
REIT by asset size at MYR4.6b (based on appraised value). It
comprises 2 properties: Mid Valley Megamall (MVM; MYR3.4b in asset
size; 74.8% of total asset portfolio) and The Gardens Mall (GM;
MYR1.2b; 25.2%). These properties form part of Mid Valley City – an
integrated commercial development which includes 1,683 hotel rooms
and serviced residences, seven blocks of commercial office buildings
(2.67m sq.ft. NLA) and 228 residential units.
Key investment merits. IGBR is a primarily retail-focused REIT and
the REIT manager, IGB REIT Management S/B, will continue its focus
on growing the retail-based assets through asset enhancement
initiatives and mall acquisitions both locally and overseas. IGBR‟s key
investment merits in our view include:
(i) Its size as the largest retail-focused REIT by asset size and the
largest REIT in Malaysia by market capitalization, thus providing an
international appeal.
(ii) Its superior location which provides long-term organic growth
potential. The properties are strategically placed within Mid Valley
City, one of the largest integrated developments in Malaysia,
catering to locals, business travelers and tourists. Mid Valley City
itself is located at the fringe of central Kuala Lumpur with proximity
to various middle to high income suburbs. We believe that
surrounding property developments (both current and in the future),
the upcoming MRT Circle line and a proposed linkage to the
existing Abdullah Hukum LRT station will further boost the footfall
and shopper traffic at the malls.
(iii) Its resilient earnings base, given that 18.5% of its gross rental
income is from tenants with long lease agreements. Also, the malls
have a diversified and sizeable tenant base of 663. No single tenant
contributes to more than 6% of total gross rental income.
Meanwhile, the portfolio tenancy expiry profile is well spread out
with 38.7% (by gross rental income) and 31% of the tenancies due
for renewal in 2013 and 2014 respectively, hence reducing earnings
volatility.
(iv) A perfect combination. In our opinion, the mature MVM, which
has 13 years of successful operation, provides for a strong and
stable earnings base while the relatively young GM (since 2007)
has the potential for stronger rental growth and hence higher
blended margins.
(v) Room for inorganic growth. With a relatively low debt-to-asset
ratio of 26%, IGBR has the ability to make yield accretive
acquisitions for growth. It has a potential war chest of approximately
MYR2.3b (at the 50% statutory limit) to fund new acquisitions
without the need to raise fresh equity capital. IGBR has been
granted the right of first refusal to acquire future retail properties in
Malaysia and overseas from its sponsor, IGB Corporation.
Page 3 of 39
IGB REIT 17 October 2011

In our opinion, working in favour of the REIT as well are the following
factors:
(i) Favourable macroeconomic fundamentals with (a) Malaysia‟s
population base being one of the fastest growing in the world, (b)
Malaysia‟s young population with a national median age of
approximately 26 years, and (c) rising affluence among Malaysians,
further spurred by the government‟s Economic Transformation
Programme (ETP) which aims at transforming Malaysia into a high
nation income by 2020 by doubling present GNI per capita to
RM48,000. In addition, the ETP‟s Greater Kuala Lumpur / Klang
Valley National Key Economic Area (NKEA) targets 10m population
for Greater KL/KV by 2012 versus 6m in 2010 while tourism will
remain an important income source to the Malaysian economy,
being one of 12 NKEAs emphasized in the ETP blueprint.
(ii) A very experienced management team. An added plus point for
IGBR is the experienced, senior team at the REIT Manager, led by
Anthony Patrick Barragry, who was involved in the development of
Mid Valley City since Day 1.
Valuation. We value IGBR at MYR1.39 based on a DCF approach as
we believe it rigorously accounts for 10 years of cashflow and a
terminal value, taking into consideration various assumptions on rental
reversions, occupancy rates and others. Our MYR1.39 TP translates to
an implied gross dividend yield of 5% (2013) which is marginally higher
than Pavilion REIT (PavREIT)‟s 4.8% and CapitaMall Malaysia Trust‟s
(CMMT) 4.8% but lower than Sunway REIT‟s (SunREIT) 5.3%.

Table 1: Portfolio of properties in IGB REIT
Mid Valley Megamall The Gardens Mall
Type Retail Retail
Appraised value as at 10 April 2012 (MYR`000) 3,440,000 1,160,000
Purchase consideration (MYR „000) 3,440,000 1,160,000
Subject properties weighting (by Appraised Value) (%) 74.8 25.2
NLA (sq ft) 1,718,951 817,053
GFA (sq ft) 6,107,103 3,379,510
Number of tenancies as at 31 Mar 2012 454 209
Occupancy rate as at 31 Mar 2012 (%) 99.8 99.7
Number of car park bays 6,092 4,128
Estimated footfall for 2011 („000) |--------------------------–––34,700 ----------------------------|

Sources: IGB REIT, CBRE

Page 4 of 39
IGB REIT 17 October 2011

Merit 1: MYR4.6b assets dwarves all listed REITs

The retail giant. With MYR4.6b in asset size, IGBR will be the 2nd
largest Malaysian REIT (M-REIT) after SunREIT‟s MYR4.9b (post-
acquisition of Sunway Medical Centre) (see Chart 1). Correspondingly,
IGBR will be the largest retail REIT in terms of appraised value and
gross floor area based on current available data from CBRE. In
comparison to its retail peers, it is 29% and 59% larger by asset size
than the likes of PavREIT and CapitaMalls Malaysia Trust (CMMT)
respectively and 4.6x larger than the small-cap Hektar REIT.
The largest REIT by market capitalization. IGBR‟s market
capitalization stood at MYR4.7b as at 15 Oct 2012. This compares
against a market capitalization of MYR4.2b for PavREIT, MYR4.1b for
SunREIT and MYR3.2b for CMMT.

Chart 1: Asset sizes of Malaysian REITs Chart 2: Free float of Malaysian REITs
MYR m (MYR m) Freefloat (LHS) Freefloat (RHS) (%)
5,000 Mixed Retail based 3,000 Retail 100
Mixed
4,500 based 90
2,500
4,000 80
3,500 70
2,000
3,000 60
2,500 1,500 50
2,000 40
1,500 1,000 30
1,000 20
500
500 10
0
0 0
muirtA rewoT lliuQ hanamA tieR AOU tsriFmA daetsuoB raqlAA- sixA llihratS TIERnuS ratkeH TMMC noillivaP BGI muirtA tieR AOU hanamA lliuQ rewoT tsriFmA llihratS raqlAA- daetsuoB sixA TIERnuS ratkeH noillivaP TMMC BGI
Sources: Annual reports of entities listed, IGB REIT Sources: Annual reports of entities listed, Bloomberg, IGB REIT

Sizeable in free float. IGBR‟s market capitalization of MYR4.7b and its
sponsor‟s stake of 51% of IGBR post listing have made IGBR the 2nd
largest Malaysian REIT in terms of free float – MYR2.3b, compared to
SunREIT‟s MYR2.6b, PavREIT‟s MYR1.1b and CMMT‟s MYR2.1b. In
our view, IGBR‟s huge free float is an attractive feature not only to
domestic but also international investors.

Page 5 of 39
IGB REIT 17 October 2011

Merit 2: Superior location draws crowd

Strategic location. Size is not at the expense of quality. MVM and GM
are strategically located at the fringe of Kuala Lumpur CBD and at the
beginning of the Federal Highway which connects the city to the rest of
Greater Kuala Lumpur. The malls‟ close proximity to some affluent
suburbs such as Bangsar, Damansara Heights, Mont Kiara and
Seputeh as well as mature townships like Taman Desa, Old Klang
Road and Petaling Jaya provide for an immediate catchment area. Its
catchment area spans the entire 6.7m population in the Klang Valley
(source: CBRE).

Chart 3: Major areas in Kuala Lumpur
KualaLumpur Population (2010)
1,674,621
Batu Caves
Gombak/ Setapak /
Wangsa Maju
Kepong / Segambut
/ Jinjang Sentul
Damansara Heights / Golden
Ampang
Mont Kiara Triangle
Kuala Lumpur CBD
Pandan Jaya /
Taman Maluri
Mid Valley City
KL Sentral / Bangsar
Sungai Besi /
Seputeh / Taman Salak Selatan
Desa
Old Klang Road / Kuchai
Lama / Sri Petaling
Cheras

Sources: Google Maps, CBRE

The “Mid Valley City” element. One of the features that distinguishes
IGBR from other retail REITs (except for SunREIT) is that its malls are
located in the mature and integrated Mid Valley City, developed by its
sponsor IGB Corporation Berhad (“IGB Corporation”). Apart from MVM
and GM, the entire Mid Valley City development also includes three
hotels (1,484 hotel rooms and 199 suites), seven office buildings
(2.67m sq.ft. in NLA) and 228 service apartments.

Page 6 of 39
IGB REIT 17 October 2011

Figure1: Mid Valley City

Sources: IGB REIT

Support from self-contained Mid Valley City. In our opinion, the
substantial commercial content of Mid Valley City has contributed
steady shopper/tourist traffic to MVM and GM. The current office
population in Mid Valley is estimated at around 14,547 workers.
Including the office developments nearby, total office population is
estimated at 117,365 workers, according to CBRE. This will be further
boosted by IGB Corporation‟s last office development in Mid Valley
City, i.e. Mid Valley City Southpoint, which we expect to add a further
5,000-6,000 workers (+4-5%) and 2,000 extra car park lots (+19.6%)
from 2015.
Growing catchment provides long-term organic growth potential.
Ongoing projects such as KL Eco City, Bangsar South and KL Sentral
are still developing, providing for a growing office/resident/hotelier
catchment for IGBR‟s retail assets. For instance, we expect the
MYR6b-7b KL Eco City, which comprises offices, service apartments
and hotel rooms, to have an estimated population of 35,000 upon
completion. Future developments include the 40-acre Setia Federal
Hills which targets mid- to high-income residents. We believe its
residential growth potential and income profile will continue to drive
footfall at MVM and GM.
Excellent accessibility and connectivity. IGBR‟s retail assets are
easily accessible. Apart from a network of highways (Federal Highway,
East-West Link Expressway, New Pantai Expressway and North-South
Highway), major roads which connect to the malls‟ key catchment areas
include Jalan Syed Putra, Jalan Klang Lama, Federal Highway, Jalan
Maarof and Jalan Bangsar. Also, MVM and GM are directly linked to the
Seremban/Rawang KTM Komuter railway line, which registered the
second highest ridership of 2.2m in 2011 after KL Sentral Station
(source: CBRE).
Indirect beneficiary of ETP. Under the Greater Kuala Lumpur National
Key Economic Areas (NKEA) initiative (under the ETP blueprint), new
Mass Rapid Transit (MRT) lines, which include the MRT 2 Circle Line
will be built to improve public transportation and connectivity between
existing rail-based networks. The Circle Line, which is targeted to be
completed by 2020, will link areas such as KL Eco City, Mont Kiara,
Sentul Timur, Ampang and the MATRADE development.
Higher capacity with the MRT. The new MRT line is designed with
higher capacity in mind compared to the existing intra-city rail network.
Page 7 of 39
IGB REIT 17 October 2011

And unlike the existing rail network, a portion of the new MRT line will
pass through some of the more affluent neighborhoods in the Klang
Valley (for e.g. Mont Kiara). Also, under the same plan, the KL Monorail
will be extended to Taman Gembira in Old Klang Road and we expect
this to benefit surrounding areas including Mid Valley City.
More than just an MRT station. KL Eco City, a mixed development
opposite Mid Valley City, will be an integrated rail transport hub
accommodating the existing Abdullah Hukum Putra LRT, a new KTM
commuter station along the Sentul-Port Klang route and a station on the
MRT 2 Circle line. We understand that there will be a linkage
connecting Mid Valley City to KL Eco City, enhancing connectivity and
accessibility of MVM and GM (source: CBRE).
Higher property value with superior transportation infrastructure.
We believe shopper traffic to MVM and GM will improve further once
the transport linkages are completed and the MRT Circle Line is fully
operational, thus translating to better accessibility and connectivity. We
believe that this will in turn translate into stronger bargaining power for
rental reversions while eventually boosting the capital values of IGBR.
Chart 4: Proposed MRT line
Sg.Buloh
Kg. Baru
Sg.Buloh
Kota Damansara
Taman Industri
Sg. Buloh
PJU5
Sentul
Dataran Sunway Matrade
The Curve
One Utama Pusat
Bandar Warisan Pasar Rakyat
TTDI Damansara KL Sentral Merdeka (KLIFD)
Cochrane
Seksyen 16 Semantan Pasar BukitBintang Maluri
Seni Central
Taman Bukit Ria
Kampung
Baru Taman Bukit Mewah
Leisure Mall
Plaza Pheonix
KL Eco City Semantan Taman Suntex
Taman Cuepacs
Bandar Tun
Hussein Onn
Balakong
Taman Koperasi
Saujana Impian
Bandar Kajang
Kajang
Source: Maybank KE, MRT Corp, KL Eco City websites

Page 8 of 39
IGB REIT 17 October 2011

Chart 5: Existing transportation system

Sources: Maybank KE, CBRE

Page 9 of 39
IGB REIT 17 October 2011

Merit 3: Perfect match provides earnings growth and
stability

IGBR’s malls are a resilient asset class, we believe. It is our view
that strategically located sub-urban malls in Klang Valley tends to be a
more resilient asset class during an economic downturn compared to
their peers in the KL City centre due to the residential catchment of the
former. The footfall of MVM and GM are mainly supported by the
office/residential population from Mid Valley City and surrounding
townships. The malls‟ 34.7m shopper traffic in 2011 was spread
between office workers and residents/tourists, hence lowering
concentration risk.
All under one roof. IGBR‟s MVM and GM complement each other with
different niche and style; combined, they create a shopping paradise.
MVM, one of the largest malls in Malaysia “for all kinds of everything” is
served as a family, tourist and lifestyle destination for locals and tourists
whilst GM is positioned as a premium fashion mall focused on the
higher income segment. The complementary nature of IGBR‟s
properties allows it to benefit from the diverse and ever-changing trends
in consumer spending.
Sustainable and diversified earnings base. 18.5% of IGBR‟s total
gross rental income is backed by tenants with long lease agreements.
These include reputable international department stores such as
AEON, Carrefour, Isetan and Robinsons and other retailers such as
Celebrity Fitness and and Golden Screen Cinema. As at May 2012,
IGBR has a diversified and sizeable tenant base of 663 tenants. No
single tenant contributes to more than 6% of gross rental income.
Well spread-out lease expiry. IGBR‟s portfolio tenancy expiry profile is
well spread out with 38.7% (by gross rental income) and 31.0% of the
tenancies due for renewal in 2013 and 2014 respectively, hence
reducing earnings volatility. MVM and GM typically have three-year
lease terms.
Chart 6: Tenancy expiry profile (by Chart 7: Tenancy expiry profile – Mid Chart 8: Tenancy expiry profile – The
gross rental income)- IGBR Valley Megamall Gardens Mall

50 50
57.5
60
38.7
40 40
35.5 50
31 31
30 30 40
19 30
20 20 17.8 22.2
19.8
20
10 10
10
0 0 0
2012 2013 2014 2012 2013 2014 2012 2013 2014

Source: IGB REIT Source: IGB REIT Source: IGB REIT

Page 10 of 39