IGB REIT
will be the largest pure retail M-REIT IPO with a market capitalisation of
RM4.25b and with the largest appraised retail property value of RM4.6b. Its
portfolio is made up of Mid Valley Megamall (family, tourist and life-styled)
and The Gardens Mall (premium fashion), both located in MidValley City, which
has benefited from being close to major highways and commuter stations. The IPO
forecasts FY12*-13E GDPU of 6.4sen-6.7sen (5.1%-5.4% yield), based on a 100%
payout, which is more attractive than the other large retail M-REIT peers of
4.9%-5.1% gross yields. We value IGB REIT at RM1.34 based on FY13E targeted net
yield of 4.5%, similar to our valuation basis for CMMT since both are pure
retail M-REITs, and share some similar valuation metrics. We recommend
SUBSCRIBE to the IPO and to hold it for the decent 5% yield. We expect M-REIT
yields to remain compressed in light of the global economic uncertainties and the
potential REIT-ing of KLCC Property assets.
IGB REIT
comprises of Mid Valley Megamall (retail; 1.72m sf NLA) and the Gardens Mall
(retail; 0.82sf NLA) with a total appraised value of RM4.6b. Both assets are
located in Mid Valley City, Klang Valley. Currently, the occupancy for Mid
Valley Megamall and The Gardens Mall are 99.8% and 99.7% respectively. Its
sponsor and parent, IGB Corporation, is an established developer and property
investment company with 40 years of experience.
Largest
pure retail M-REIT with a market cap of RM4.25b, of which 670m units (out of
3,400m units) are earmarked for the IPO (70% institutions, 30% retail), based
on a retail IPO price of RM1.25. Following closely behind IGB REIT in terms of
market capitalisation size is Pavilion REIT (RM4.08b), Sunway REIT (RM4.02b)
and CMMT (RM3.02b).
Low gearing
provides ample room for acquisition growth. Gearing post- IPO will be at 26%
and assuming a comfort level of 40%, we assume that the group can gear up by an
additional RM663m for new acquisitions. Alternatively, with a substantial
shareholder base of RM3.4b and using the popular fund raising mechanism of
placements (20%) by many M-REITs, the group can raise up to RM850m new funds
where such fund size is sufficient to acquire relatively sizeable neighbourhood
malls. IGB REIT has the right of first refusal (ROFR) from its parent for
future retail properties and mixed-use developments with a retail component.
However, the group indicated that it will concentrate on organic growth
opportunities rather than on new asset acquisitions in the short to medium
term. There are plenty of AEI (asset enhancement initiatives) opportunities
within the two malls, particularly as we expect FY13E to see strong positive
rental reversions as 54% of the NLA will be expiring. Since we are unable to
identify any near term asset injection opportunities from its parent, we believe
that its share price appreciation may be slower than other retail M- REITs.
Peak
valuations for assets offer upsides to IGB REIT valuations. The average cap
rates applied on IGB REIT is 5.5%. However, other retail MREITs (referring to
CMMT, Pavilion and Sunway REIT) are utilising 6.5%-6.9% cap rates as a
conservative valuation measure (to avoid potential write-down in FV gains if
cap rates rise). These conservative cap rates have caused them to trade at
premiums to their BVs of 1.36x-1.51x due to a lower valuation surplus. Should we
re-work the other M-REITs’ retail asset valuations at 5.5% cap rates to derive
the ‘true/comparable’ Fwd PBV of the other retail M-REITs, it appears that IGB
valuations seem fair when compared to CMMT but is expensive against Pavilion or
Sunway REIT (see table below for details). Nonetheless, its FY12-13E gross
yields of 5.1%-5.4% are attractive vs. its peers’ average of 4.9%-5.1%.
Source: Kenanga
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