Maintain HOLD. While IGB REIT’s (IGBR) medium/long-term outlook remains favourable driven by potential space reconfiguration and asset injections by its sponsor, we expect its unit price to move sideways in the near term due to profit-taking by KrisAssets minorities. No change to our earnings forecasts and MYR1.39 DCF-based target price. A good entry level is at ≤MYR1.32, in our view, which would give a total return of 10.4% (5.3% dividend yield, 5.1% implied capital gains).

The ‘minorities’ impact. The decent gain of 35% would encourage KrisAssets’ minorities to take profit, limiting upside for IGBR in the near term, we believe. To recap, the disposal of Mid Valley Megamall (MVM) and the Gardens Mall to IGBR involved cash and 2.73b units of distribution-in-specie (IGBR units) to KrisAssets shareholders. This distribution was based on an attractive price of MYR1.00/unit.

No change in anchor tenants, at least for now. While Carrefour staying on as an anchor tenant removes the fear of income loss (we estimate a decline of c.2-3% in our FY13-14 gross rental income forecasts), it will also limit potential upside for rental reversions. We believe IGBR could easily double or triple its rental rate psf by converting the space currently leased to Carrefour (LG floor; 211,431 sq ft) into smaller, high-yielding retail units (e.g. F&B outlets), which would be an immediate boost to its rental income.

Potential injection over the longer term. IGBR’s sponsor IGB Corp’s potential win of the largest urban project in Taipei (Taipei Twin Towers, worth MYR8b) will provide IGBR with a pipeline of potential asset injections over the longer term, on top of its MYR6b Southkey Megamall in Johor Bahru. IGB Corp is also bidding for a mixed development project in London, we understand. Note that IGBR’s right of first refusal also includes IGB Corp’s retail properties overseas.

Fairly valued. IGBR currently trades at an FY13 gross yield of 5.2% vs. its retail peers’ 5.0% (PavREIT: 4.8%, CMMT: 5.0% and SunREIT: 5.2%). We like its quality assets, earnings resilience, decent market capitalisation and liquidity. Total return is 8.7% based on our TP.

Source: Maybank Research - 6 Nov 2012