We maintain our HOLD rating on IGB REIT with a higher DDM-derived price target of RM1.74 (from RM1.63), incorporating a 1.4% earnings accretion from the recently completed asset enhancement initiative (AEI) at The Gardens Mall and a lower discount rate, taking into consideration the improving consumer sentiment and its solid Ytd-18 performance. Operationally, IGB REIT continues to perform admirably with an asset utilisation of over 99% and high NPI margin of 73% (1H18A). At a 5.5% 2019E dividend yield, IGB REIT’s valuation looks fair, within its historical trading range and comparable to peers’.

AEI at The Gardens Mall Added 14,000sf of NLA

IGB REIT recently completed an AEI at The Gardens Mall (Fig 1), adding 14,000sf of NLA on the lower ground floor and connecting the Din Tai Fung & Purple Cane Tea Cuisine restaurants to the parking lifts at the North section (Fig 2). The 12 F&B and lifestyle tenants at the new retail space include Wendy’s, Watson, San Francisco Coffee and Ko Hyang.

We Forecast the AEI to Add 1.4% to 2019-20E EPS

Management is tight-lipped on the average rental for the new NLA and the projected revenue contribution. Assuming an average monthly rental of RM30 psf (versus the estimated rental range of RM18.10-40.15, Fig 3), we forecast the new NLA to contribute RM5m of additional revenue per annum and lift IGB REIT’s 2019-20E EPS by 1.4%.

While the AEI Offers High ROI, It Is Not Easily Replicable

The expansion took place in an under-utilised area. With a capex of merely RM6m, the AEI offers an attractive return on investment. However, we understand that the initiative is not easily replicable – eg, at the southern tip of the lower ground floor at The Gardens Mall, there is Jaya Grocer, a relatively established tenant occupying a contiguous block.

Maintain HOLD With a Higher TP of RM1.74

We maintain our HOLD rating on IGB REIT with a higher DDM-derived target price of RM1.74 (from RM1.63) after imputing the 1.4% earnings accretion and a lower discount rate of 8.2% (from 8.5%), taking into consideration the improving consumer sentiment and IGB REIT’s solid ytd- 18 business performance. At a 2019E dividend yield of 5.5%, its valuation looks fair. Upside risks include higher-than-expected retail spending; downside risks include hike(s) in the interest rate.

Source: Affin Hwang Research - 25 Sept 2018