Highlights

• Tenant sales growth: During our recent meeting with IGB REIT, despite the challenging retail operating environment, management was optimistic that yoy tenant sales growth in FY17 can be sustained around the high single digits.

• Lease renewal: We understand that all net lettable area (NLA) expiring in FY17 in both Midvalley Megamall (MVM) and The Garden Mall (TGM) has been renewed at mid-single digit rental reversion rate. Going forward we opine that similar reversion rate is achievable due to the healthy tenant sales enjoyed by both MVM and TGM.

• Inorganic growth: Midvalley Southkey Megamall (MSM) is expected to start operating in August CY18 and the potential injection of this asset into IGB REIT will increase total NLA by 60%. However, injection of MSM will only happen at the earliest in CY21 after the one tenancy cycle (3 years) to allow stabilization in rental and occupancy rates.

• Gearing: IGB REIT’s current net gearing stands at about 0.24x (as at 1QFY17) and this provides ample room for acquisitions. However, we do not expect any acquisitions in the near term due to lack of high quality malls available at attractive price.

• Pure retail REIT: Management reiterated that IGB REIT will remain as a pure play retail REIT going forward and its sponsor will not inject any other types of commercial properties (office towers, hotel etc) into the REIT. We deem this positive as a pure play REIT is more analyzable and tends to enjoy a valuation premium relative to peers as it offers more clarity on its prospect.

• Outlook: We are impressed with tenant sales growth and rental reversion rate recorded by IGB REIT. We believe IGB REIT is shielded from current challenging retail environment in Klang Valley due to prime location and high traffic enjoyed by both MVM and TGM.

Risks

• High portfolio concentration, with only two malls.

• Highly sensitive to downturn in consumer spending.

Forecasts

• We incorporate higher rental reversion rates and lower operating expenses assumptions to reflect resilient performance for both MVM and TGM, resulting in higher FY17-19 bottom-line by 5.1%, 6.5% and 9.5% respectively.

Rating

• BUY , TP: RM1.84

• We upgrade IGB REIT to BUY (from HOLD) as we reckon that rental reversion rates of both MVM and TGM are sustainable as it is still significantly lower than the tenant’s sales growth recorded. Moreover, prudent management and healthy balance sheet further enhance attractiveness of the stock.

Valuation

• Upgrade to BUY with TP increased from RM1.73 to RM1.84 with unchanged targeted yield of 5.4% to reflect better than expected tenant sales growth and rental reversion rate.

Source: Hong Leong Investment Bank Research - 22 Jun 2017