- We initiate coverage on IGB REIT, with a HOLD recommendation and a fair value of RM1.38/unit, based on a 10% discount to our DCF value of RM1.53/unit. At RM1.38/unit, the implied distribution yield is 4.9% on FY13F earnings.

- IGB REIT, which comprises Mid Valley Megamall (MVM) and Gardens Mall (GM), is the largest pure retail M-REIT with a market capitalisation of RM4.7bil. We project DPU growth of 6% and 4% for FY13F and FY14F, respectively, underpinned by:-  (1) GM ' 54% of NLA expiring in FY13 with rental growth assumption of 13%; and (2) MVM ' 37% of NLA expiring in FY14 with an assumed 5% growth in rental. 

- There are two critical value propositions for IGB REIT. Firstly, management's ability to extract higher rentals for its premium mall, GM. As it is, GM's average rental is RM8.74psf ' at a discount to the premium malls in the city, namely, Suria KLCC at RM25psf and Pavilion Mall at RM17psf. Notwithstanding its location, we note that GM's Grade A office is commanding rentals of RM8psf, comparable to offices located in the Golden Triangle. MVM's average rental of RM10.75psf is comparable to Sunway Pyramid at RM10.30psf. Therefore, we expect  a 3-year rental CAGR of 5%. Additionally, KL Eco City, which has been fully sold, could potentially drive rentals further in MVM and GM.

- The second driver is from acquisitions. IGB REIT does not appear to have a ready pipeline of assets to be injected, unlike CMMT and PavREIT. The sponsor is developing a retail mall in Johor Bahru, called Southkey Mall. This particular injection can only materialise earliest in the eighth year ' upon completion (5 years time) and stabilisation of the mall (at least 3 years in operation). 

- PavREIT, on the other hand, has a steady pipeline of asset injections ' Fahrenheit 88 (FY14), da:men Mall in USJ (FY15), and Pavilion Extension (FY16). Likewise, CMMT has the ROFR to Queensbay Mall and an upcoming mall in Taman Melawati and arguably, has the strongest parent, CapitaMalls Asia.

- For PavREIT, being the premium city mall, we expect a higher rental growth underpinned by 67% of NLA expiring in FY13F and a relatively young mall. Key catalysts for CMMT will be driven mainly by the East Coast Mall as it is in the midst of asset maximisation, whereby average rentals are low at only RM5psf and in view of the potential conversion of the carpark space into an additional 23% NLA.

- Looking at the Enterprise Value/psf for FY12F, PavREIT (RM3,057psf) is the most expensive given its premium status and location, followed by IGB REIT (RM2,325psf) and CMMT (RM1,578psf). 

- Our fair value implies distribution yields of 4.6% and 4.9% for FY12F and FY13F, respectively. This would therefore put the REIT's distribution yield at parity to PavREIT and CMMT, which stands at 4.5% and 4.3%, respectively, for FY12F.

- Gearing is manageable at 27%, suggesting room for additional debt for future asset acquisitions, and allowing flexibility for the REIT to either acquire purely by debt or a mix of debt and equity funding.