- We re-affirm our HOLD recommendation on IGB REIT (IGBR), with an unchanged fair value of RM1.38/unit, based on a 10% discount to our DCF value. This follows release of its 4Q results.
- IGBR posted a 4QFY12 realised net income of RM47mil, bringing pro-rated 3-month and 11-day (covering 21 September 2012 to 31 December 2012) realised net income to RM53mil. On an annualised basis, the FY12 results were within our, and consensus, expectations. Furthermore, the pro-rated FY12 results exceeded management’s expectations by 2.4%.
- IGBR declared a distribution of 1.83 sen/unit. This implies a distribution ratio of 100%, reflecting a 1.4% dividend yield. Looking ahead, we project yields of 4.3% and 4.6% for FY13F and FY14F, respectively.
- IGBR’s key growth driver this year is the expiry of a voluminous 54% of Garden Mall’s NLA. This would enable the REIT to extract higher rentals for its premium mall, underpinned by a relatively young mall status and only in the second round of rental reversion.
- More importantly, the Garden Mall’s average rental stands at RM8.74psf, which is at a discount to other premium malls in the city. For instance, Suria KLCC’s average rental is at RM25psf and Pavilion Mall’s at RM18.80psf. Notwithstanding its location, our channel checks suggest that Garden Mall’s Grade A offices are commanding rentals which are comparable to offices located in the Golden Triangle.
- Nonetheless, we see a potential re-rating catalyst in Mid Valley Megamall if Carrefour decides to exit the mall or reduce its NLA exposure. Carrefour is an anchor tenant, with a 12.3% NLA exposure. We believe the floor space currently occupied by Carrefour can easily boost rentals via converting the space into small speciality stores. This is evident in Pavilion Mall’s recent conversion of an ex-anchor tenant floor space into smaller speciality stores (Fashion Avenue).
- Taking all in, we assume a rental growth of 13% for the 54% of NLA expiring in FY13F for Gardens Mall. The mall achieved a rental reversion of 11.8% in the first rental cycle. About 37% NLA of Mid Valley Megamalls expiring in FY14F is estimated to grow at 5%.
- IGBR’s growth appears to be organic given no visibility of potential asset injection in the short term. Assets under its sponsor, IGB Corporation, are rather far-off at this juncture, in our view. We believe the upcoming Southkey Mall could potentially take a good 8 years incorporating 5 years for construction and another 3 years for stabilisation of rental yields before being injected into the REIT. Thus, our HOLD recommendation is pending constructive asset injections.