Highlights

IGB REIT is the owner and operator of Mid Valley Megamall and The Gardens Mall, and is the largest REIT in Malaysia in terms of market cap and value of retail assets (RM4.6bn).

The REIT portfolio comprises of Mid Valley Megamall and The Gardens Mall, with combined NLA of 2.53m sft. Both malls are running close to 100% occupancy rate, supported by a strong mix of tenants such as Robinsons, AEON and Isetan.

In our view, IGB REIT offers good exposure to Malaysia’s domestic trend of rising consumerism and its booming tourism industry.

We also believe they have a strong management team, with an impressive asset enhancement initiatives track record.

Catalysts

The Gardens Mall to provide the next growth story, as we expect average rental to surpass RM10 psf within 3 years (vs. RM8.43 psf achieved in FY11).

Additional war-chest of RM2.26bn, should the REIT Manager decide to raise the REIT’s gearing level from the current 0.26x to the maximum allowable 0.50x (as per the Security Commission’s REIT guidelines).

A for future acquisitions, we opine that the Sponsor pipeline is long-dated and limited, as we expect the Southkey development in Johor to take more than five years to be ready for injection into IGB REIT.

Risks

High portfolio concentration, with only two malls; highly sensitive to a downturn in consumer spending .

Forecasts

We forecast EPU growth of 6.4-7.5% for FY13-14 with the main engine of growth to come from The Gardens Mall, with 53% of its NLA up for renewal in FY13.

Rating

We still think that IGB REIT has a leg up to go, and is likely to play catch-up with Pavilion REIT in terms of DY.

Given our expectation of more than 10% overall upside, we initiate coverage on IGB REIT with a BUY. IGB REIT is our top pick in the M-REIT sector.

Valuation

We value IGB REIT based net DY, with the closest peers being CMMT and Pavilion REIT (“pure play” specialists in the Malaysian retail scene).

In our view, IGB REIT should continue trading at a premium to Sunway REIT, which has nearly 40% of its NPI derived from non-retail assets.

Should IGB REIT successfully play catch-up with Pavilion REIT and trade at 4.8% net DY (FY13E), this would give us a TP of RM1.42.

Source: Hong Leong Investment Bank Research - 21 Nov 2012