IGB Corporation - Special dividends poser

-  We reaffirm our BUY rating on IGB Corporation, but with our fair value cut to RM3.20/share after assigning a higher discount of 30% to our revised estimated NAV of RM4.60/share. The higher discount is to reflect the uncertainty on the pay out of special dividends.  

-  Following the listing of IGB REIT – IGB Corp raised about RM770mil – the lingering concern is whether IGB’s shareholders would be rewarded with special dividends. Thus, it is not surprising that the stock has mostly traded sideways, post the REIT listing announcement.  

-  We believe management ought to engage in a more active capital management exercise. We believe special dividend is now the primary re-rating catalyst for the stock. However, our recent talks with management indicate that special dividends remain uncertain at this juncture. 

-  On the other hand, we argue that IGB needs to strike the right balance between distributing special dividends and redeploying capital for investments.  Recall that IGB is looking at redeploying its capital overseas – London & Taipei – whereby we understand IGB would require some RM1bil to fund the acquisition of a site in London. 

-  (2) In any case, management has guided that the company would maintain its FY11 dividend of 7.5sen/share (yield of 3%), which would translate into a payout of 50%-55% – a stark improvement vis-a-vis the average of 20% in the last few years. 

-  (3) IGB is expecting the outcome of its tenders for proposed developments in London and Taipei to be known by the end of this year or early next year. We understand IGB is looking at redeveloping a distressed property in Central London which will comprise residential and office properties and a hotel. Meanwhile, the company is looking at being involved in a redevelopment of an MRT station in Taipei, which will have similar development mix. 

-  (4) Based on 2011 figures, the lower taxation charges – IGB REIT would not be paying tax – would more than offset the higher minority interests following IGB’s 51%-stake in IGB REIT. We estimate IGB’s earnings jumping by 2%-6%, post IGB REIT listing.  

-  IGB is currently trading at a steep 45% discount to its estimated NAV. We believe the stock would continue to trade within this range amid the uncertainty over the distribution of special dividends. We continue to like the company due to its solid earnings, upside from the potential ‘REIT-ing’ of its office assets and attractive valuations. 

Source: AmeSecurities