- 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.

- IGBR 1QFY13 realised net profit were within expectation at 24% of ours and consensus’ full year estimates. Against the group’s forecast as disclosed in the prospectus, 1QFY13 realised net profit exceeded by a marginal 2%.

- On sequentially basis, distributable income grew 5%, despite a marginal drop in revenue of 0.5% QoQ caused by a lower percentage of rent in the 1Q. Nevertheless, net property income showed positive jump of 3% QoQ, thanks to reduced advertising and promotion expenses.

- Organic growth is expected to be the key driver for IGBR via various accretive asset enhancement initiatives to drive rentals and tenant mix.

- Major earnings kicker is the upcoming The Gardens Mall’s major rental reversion (54% of NLA) this year. Given its relatively young and premier mall status compared to Mid Valley Megamall, we expect stronger upside in rentals. As such, we have projected a 13% rental reversion this year for The Gardens Mall – largely in line with management guidance of 15%.

- Elsewhere, FY14F would be bolstered by 37% of NLA expiring NLA at Mid Valley Megamall. We reckon any major boost on the rental upside can only come from reconfiguration of space into smaller speciality stores, given its matured mall status.

- The Gardens Mall’s rental would eventually play catch-up to Mid Valley Megamall’s levels as the gap narrows, in our view. However, we reckon this could happen in the next rental cycle for The Gardens, based on our back-of-theenvelope calculation. Blended rentals stood at circa RM9+psf and RM10+psf for The Gardens and Mid Valley, respectively.

- In terms of inorganic growth, the upcoming injection of Southkey Mall in Johor by the sponsor is no doubt a potential catalyst, but will only happen in the long-term. It would take up to 8 years for the injection to materialise in view of at least 5 years for construction and 3 years for stabilisation of rentals.

- Our HOLD call is clearly premised on absence of a visible near-term acquisition catalyst to re-rate the stock.

- Under our REITs universe, we have a top BUY on CapitaMalls Malaysia TRUST (FV: RM2.15/unit) due to a first-mover acquisition advantage, which is DPU accretive.

Source: AmeSecurities