Another Mid Valley Megamall in the Making

We foresee the acquisition of Southkey Megamall (SKM) in Iskandar Malaysia as a highly DPU enhancing (by an additional 20% more), yield-accretive and may potentially add RM0.11-0.15 in NAV. The acquisition is expected to materialize by 2020-2021. Otherwise, IGB REIT’s earnings will remain business-as-usual (until 2020), sustained by net property income of its two key retail mall assets. Reiterate HOLD, with PT unchanged at RM1.68.

Southkey Megamall – Changing the Southern Region Retail Landscape

We remain upbeat on IGB REIT’s potential asset injection, the Southkey Megamall (SKM) which is currently under construction and expected to officially open by end-2018 (with soft launch on 8/8/18). We view SKM as another Mid Valley Megamall (MVM) in the making owing to its potential to plug-in the retail demand gap in the southern region and serve the population from Malacca, Johor and Singapore. We believe that the mall will replicate the success of MVM and introduce a whole new modern retail concept. In our view, a well-conceptualized retail mall (such as SKM) will have the ability to attract migration of retailers and tenants.

A Valuation of RM0.11-0.15 in NAV Based on Initial Assumptions

In our view, SKM is likely another MVM in the making, based on the initial assumptions: i) a potential gross rental revenue of RM356m to RM405m p.a. (monthly rental of RM22-25 psf vs. prime market rates of RM27psf); ii) a 70% net property income margin; iii) acquisition price of between RM3.56-4.05bn, funded by 50 :50 bank borrowings to new equity.

Reiterate HOLD, With Price Target at RM1.68

We Reiterate Our HOLD Rating and DDM-derived 12-month Target Price of

RM1.68. We expect IGBREIT’s earnings to remain resilient on: (i) stable occupancy rates (c.100%); (ii) an experienced management team; and (iii) more efficient cost management. We think 2017-19E DPU yields remain attractive at 5.4-5.8% vis-à-vis the peer averages of 5.4-5.5%. The likelihood of sustained renewals in 2017 (with 40% of MVM’s and 42% of TGM’s net lettable areas due for renewal) and positive rental reversions continue to justify the higher DPU payouts in FY17-19E, in our view.

Key Risks – Slowdown in Consumer Spending

Risks: i) Lower/higher consumer spending; ii) competition from new supply and online websites; and iii) higher/lower debt-refinancing rates.

Source: Affin Hwang Research - 27 Sept 2017