IPO Price: RM1.25
Target Price (TP): RM1.43
Closing IPO date: 6 September
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INVESTMENT HIGHLIGHTS
 

Potentially largest REIT in Malaysia: Upon listing, IGB Real Estate Investment Trust (Pavilion) is potentially the largest real estate investment trust (REIT) in Malaysia with a total market capitalization of RM4.25b (based on retail price of RM1.25 per unit).  Comprising of Mid Valley Megamall (MVM) and The Gardens Mall (TGM), IGB REIT will be the second largest REIT in terms of asset size. The market capitalization of IGB REIT will generate interest among local and international investor.  
 

Quality Assets at Strategic Location: MVM and TVM are located at Mid Valley City (MVC) which is one of the leading mixed-used developments in Malaysia. Apart from the two retail malls, 3 four to five star hotel and 7 commercial office buildings are erected on the 50 acres development. MVM and TVM has been benefitting from the synergies created by the mixed-used development. The office population in MVC alone is estimated at about 14.5K and the estimate increase by 8X if the commercial precinct within 5KM drive distance from MVC is taken into account. The commercial area within the vicinity includes KL Sentral, Bangsar South, Kerinchi, Old Klang Road etc.

MVC has a population catchment of about 6m as at end of 2010. Established neighborhood in vicinity includes Bangsar, Damansara Heights, Seputeh and Petaling Jaya. MVM’s mid-market and TVM’s higher end positioning are able to capture wider range of the population catchment. Furthermore the future development of other mixed development like KL Eco City and Bangsar South will further enhance the shopper traffic and connectivity of MVC. MVC’s connectivity is far superior via five major conduits (Jalan Syed Putra, Jalan Klang Lama, Federal Highway, Jalan Maarof and Jalan Bangsar. MVC is also well connected by public transportation like KTM line and future linkage to MRT Circle line and LRT via KL Eco City.

IPO Details:  
Listing details: IGB was granted approval to list on the main market with total issue units of 3.4m units and an additional 150k units as part payment of the management fees. Offer for sales for retail and institutional investors is 670m units which represent 19.7% of IGB REIT’s enlarged share capital. KrisAssets will receive 2.73m units and subsequently will distribute the units to its shareholders. IGB Corp (sponsor and major shareholder of KrisAssets) will receive 1.73m units. Retail and Institutional investors’ portion of the total units in issue will increase to 1.67m units upon the distribution by KrisAssets.

Largest exposure to retail sector: IGB REIT offers the largest exposure to the retail sector with total asset size
worth RM4.6b. Wholesale and retail sector was envisaged to be the second biggest contributor to the gross
national income (GNI) among the 12 National Key Economic Areas (NKEAs) announced under the ETP. In the
past few years, regardless of economic conditions private consumption has consistently accounted for 45-50% of
our GDP. Future earnings of IGB REIT is expected to be resilient due to the retail focus strategy, mid to high end
position as well as strategic location of the two malls.

Growth Potential: Organic growth potential for IGB REIT is primarily driven by TGM which command average
rental of RM8.74psf in contrast to RM10.75psf achieved by MVM. Even though targeting higher end shoppers,
TGM rental was significantly lower as it only opens its door in 2007. MVM is relatively more established as it
commence operation in Nov 1999. Moving forward, average rental for TGM is expected to close the gaps with
MVM  and hence contribute to the organic growth of IGB REIT. Tenancies expiry of MVM are well spread out over
the next 3 years but 53% of TGM’s tenancies will expired in 2013. That also partly explains higher revenue growth
in our projection for FY13. We are expecting about 10% rental growth for MVM and 10-15% growth for TGM.

Acquisition growth relatively uncertain: IGB REIT future acquisition will be retail assets similar to its existing
portfolio. At current juncture, acquisition growth potential will be limited to third party assets as pipeline assets from
the sponsor (IGB Corporation) is limited. Nevertheless, the management is still open to third party assets in
Malaysia and overseas. Earlier this year, the sponsor announced a JV project to develop MVC type of
development in Johor Bahru. However the development will likely to take a few years to crystallize. Dilution impact s not major concern as IGB REIT’s gearing level is 26% upon listing. Assuming gearing level is lifted to the
maximum of 50%, IGB REIT could potentially raise about RM1.1b for future acquisition.

Experience property manager:  The REIT manager is IGB REIT Management S/B which will set the overall
strategy, risk management strategy, new acquisition and disposal, marketing and communications, individual asset
performance and business planning as well as other activities as provided under the deed. Apart from Tan Sri
Dato’ Dr Lin See Yan and Mr. Robert Tan sitting on the board of director, the management team comprises of
experience personnel which had been managing the assets prior to the listing. The success of MVM and MGM
over the year epitomized the credential of the management. The top management of IGB REIT includes Antony
Patrick Barragry (CEO), Daniel Yong (Joint COO) and Elizabeth Tan (Joint COO). They had 8 to more than 10
years experience in the management as well as development of MVC.

Distribution policy: The management intends to distribute up to 100% of IGB REIT’s distributable income from
the establishment to 31 Dec 14 and thereafter at least 90% of distributable income on semi-annual basis.

Property Portfolio:
Mid Valley Megamall:  Positioned towards mid market segment, MVM is the third largest (1.7m sq ft of NLA)
shopping mall in Malaysia after Berjaya Time Square (2.1m sq ft NLA) and One Utama Shopping Centre (1.72m sq
ft NLA). MVM is home to more than 450 retail tenants, anchored by AEON (Department store), Metrojaya
(Department Store), Carrefour (hypermarket), Golden Screen Cinema, Toys ‘R’ Us (toy store), Kamdar (fashion &
textile store) and Oasis Foodcourt. The top 10 largest tenants take up an aggregate of 57.7% of total area in the
mall whereby majority of the space are taken up by department stores and supermarket. Contrasting to the
massive space these tenants occupied, rental income from the tenants only accounted for 22.1% of total income.
Recently MPH was relocated to lower floors which open up space to rent to higher yielding tenants. We believe
rental yield will be higher if some of the anchors are converting to smaller retailers.

The Garden Mall: TGM is the only premium fashion mall in the suburbs area. Other premium fashion mall like
Pavillion KL, Starhill Gallery and Suria KLCC are located in KL City Centre. It was opened in 2007 with 817k sq ft
of NLA. There are 208 retail tenants as at 31 Mar 12. Positioned towards the higher end of the market, TGM
complement the existing MVM as its will cater to upper middle to upper income families within its catchment area.
TGM is anchored by three major fashion stores, i.e. Isetan, Robinson, Marks & Spencer as well as Cold Storage.
These stores occupy 35.9% of total NLA. Apart from the luxury and premium brands like Louis Vuitton, Burberry,
Coach, Mulberry, upper middle income brands like Armani Exchange, Banana Republic, DKNY and Calvin Klein
also presence in the mall.

Valuation: The retail IPO price of RM1.25 implying distribution yield of 5.5% for FY13 and P/NAV of 1.26X. The
yield appears to be much lower as compared to the market average. Nevertheless, the valuation is not overly
stretched comparing it with the bigger cap M-REITs including Sunway, CMMT and Pavillion REIT. Our fair
valuation for IGB REIT is RM1.43, based on Gordon Growth Model (WACC 8.22%, Long term growth 3.45%).
Recently, share prices of M-REITs have been rising due to the relative resilient of earnings. There are strong
interests in IGB REIT as the retail and institution portion of the offer for sales were oversubscribed. Hence we
believe our estimated fair value (capital gain potential of 14%) is not overly optimistic.

Source: MIDF Research - 6 Sept 2012