IGB REIT’s earnings will be led by the organic growth from Mid Valley Megamall (MVM) and The Gardens Mall (TGM). TGM’s major rental renewal and MVM’s asset enhancement initiatives (AEI) and tenancy remixing will be the key earnings drivers. Catalyst from inorganic growth via acquisition is however lacking in the short-term. Given limited upside to the stock, we downgrade our call on IGB REIT to Neutral with an unchanged fair value of RM1.43.
TGM to continue blooming. IGB REIT’s next growth catalyst will likely be the major rental renewal for TGM, as leases for about 54% of its NLA are due to expire in FY2013. Management expects rental reversions of about 15% (over a three-year period) for the renewals, in line with the market average and our assumptions.
Asset enhancement initiatives and tenant remixing key to MVM’s sustainability. The REIT manager is more proactive with its AEI and tenant remixing exercises in MVM. Its most recent AEI on the third floor had resulted in additional retail NLA of approximately 21k sqf and incremental revenue from the new tenants that were brought in. The conversion of MPH’s space on the Ground Floor into a fashion-centric area has also brought in higher-yielding tenants such as Uniqlo and Forever 21.
Anchor tenants are likely to stay. Management indicated that MVM’s anchors, AEON and AEON BIG (the rebranded Carrefour), target slightly different market segments. Hence, cannibalisation of shopper traffic and sales will be insignificant. We also understand that the anchors are likely to renew their long-term leases.
Investment case. We are revising our call on the stock to Neutral (from Buy) with unchanged fair value of RM1.43. Share price has performed in line with our expectations. Although the assets are well-managed, given that the Southkey Mall will only be ready in 3-4 years’ time, and hence limited near-term catalysts for inorganic growth, we believe the REIT is now fully valued.