We favour IGB REIT for its concentrated prime assets, sustainable tenant sales growths and positive rental reversions. IGB REIT has a lot to offer thanks to upcoming AEIs to enhance the properties and stay abreast of the retail market, not forgetting the possible future injection of Mid Valley Southkey Megamall. We revise our 10-year MGS yield assumption to 4.0% (from 4.1%) and roll forward valuation to mid-FY20. Maintain BUY call with higher TP of RM2.05 (from RM1.91).

Mid Valley Megamall. Completion of asset enhancement initiatives (AEIs) in Centre Court at Basement and Ground floor level back in 4Q18 has increased their rental space, whereby the mall is now able to accommodate additional new retail outlets making up to 556 tenancies (FY17: 541). This has led to higher rental returns and improved accessibility of the mall.

The Gardens Mall (TGM). Multiple AEIs; (i) increase of 14k sqft of new retail space which was completed back in 2H18 has made the number of tenancies grow to 237 (from 228) and provided added accessibility to the lower and ground floor at the North wing, (ii) upgrade works on escalators is currently focused on South Court, whereas the Centre Court and North Court escalators upgrade works have been completed and are now equipped with improved energy saving and safety features and (iii) upgrade works at Riverview Entrance is close to completion, and the 2 new bridges that connect the first floor of TGM to KL Eco City and Menara Southpoint are ongoing, and are on track to open in 2Q19. These bridges will offer greater connectivity to Mid Valley City, particularly to the KTM and LRT lines. The opening of KL Eco City is believed to be a boon to Mid Valley City, in other words, bolstering footfall, sales, accessibility and dynamism.

Capital management. IGB REIT’s income and cash flows are not affected by changes in market interest rates as 100% borrowings are made up of AAA-rated Medium Term Notes bearing a fixed coupon rate which is not subject to fluctuations. Gearing stood at 27%, (below the gearing limit of 50%) with plenty of headroom for future acquisitions.

Mid Valley Southkey Megamall. This pipeline asset with 1.5m sqft of NLA in Iskandar Johor, conveniently located next to the Eastern Dispersal Link Expressway (EDL) will be having its soft opening in 2Q19 with committed occupancy of close to 100%. However, injection of the mall to REIT is expected to only take place in 2022, as newer malls normally takes one rental cycle (3 years) to stabilize.

Outlook. We believe both assets will continue to perform well, as they are resilient to the challenging retail environment in Klang Valley thanks to its prominent location which contributed to strong footfall traffic into the malls, hence preserving the malls’ rental and high occupancy rate of close to 100%. Also, some major AEIs along with tenant renovations are set to take place that will continue to excite the market.

Forecast. Unchanged.

Maintain BUY, TP: RM2.05. We maintain BUY at higher TP of RM2.05 from RM1.91 based on targeted yield of 5.5% (from 5.6%). Following the dovish tone by major central banks (Fed and ECB) as well as BNM, we revise our assumption of the 10- year MGS yield to 4.0% from 4.1% previously (currently at 3.8%). We also included in Annual Report figures, roll forward valuation to mid-FY20, and introduced FY21 estimates. To note, our valuation model is based on the targeted yield of 2-year historical average yield spread between dividend yield and 10-year MGS yield.

Source: Hong Leong Investment Bank Research - 2 Apr 2019