We are initiating coverage on IGBREIT with a MARKET PERFORM recommendation and a TP of RM1.23 based on target FY14E gross yield of 6.0% (net: 5.4%), suggesting a 8.7% total return. IGB REIT is the owner of pure high quality retail assets, namely Mid Valley Megamall (Mid Valley) and The Gardens, which are both strategically located to capture a wide catchment area within the Klang Valley, while catering to a diversified tenant mix. It is also the largest retail based MREIT by market cap and NLA. The group has strong growth potential as both assets’ rentals are at among the lowest average rates for landmark malls in KL. We believe there is also more value to be unlocked from its premium retail asset, The Gardens, as average rental rates are lower than Mid Valley which is targeted at the mass segment. Both Mid Valley and The Gardens have a two-year tenancy waiting list and occupancy has been consistently high at 99%-100% since 2009.

Largest retail-based REIT by market cap and NLA exposure to retail with a large asset base of RM4.9b. IGB REIT is the largest retail-based REIT in town by market cap of RM4.1b, which is bigger than Pavilion, CMMT and Sunway REIT. Its malls also have the highest retail exposure in terms of NLA of 2.59m sf which is still larger than Pavilion, CMMT and Sunway REIT. IGB REIT tends to benefit from having a large asset base which means greater gearing power. Its size and varied retail exposure, which targets both mass and high-income shoppers enables it to capture wider foot-fall traffic and enjoys strong visibility amongst shoppers. It also provides the asset owners ample flexibility in reconfiguring the malls to suit new trends or market conditions.

Better growth opportunities with average rents being on the lower end compared to other Klang Valley malls. Mid Valley Megamall’s (Mid Valley) average monthly rental of RM10-12psf/month is on par with Sunway Pyramid at RM10-12psf/month while being below that of Sungei Wang at RM11-RM13psf/month. On the other hand, The Gardens has lower average rental rates at RM8-RM10psf per month, which is significantly lower compared to Pavilion (RM16.00-RM18.00 psf/month) considering their similar market positioning. The Gardens also fetches lower rental rates than its sister, Mid Valley, although the former is considered a premium mall compared to the latter because The Gardens is only 6.5 years old compared to its sister, Mid Valley (14 years old). Due to its low average rental rates, both Mid Valley and The Gardens may be able to command higher rental reversion, and as such, better growth opportunities going forward. We expect healthy reversion rates of 10% to 15% for spaces up for expiry in FY13, FY14E and FY15E.

Expecting FY13E, 14E, 15E gross dividend yields of 5.7%, 6.1%, and 6.3% on the back of core earnings (RNI) of RM204m, RM221m and RM230m. FY14E will continue to be driven by the lumpy lease expiry in FY13 of 31% of Gross Rental Income (GRI) while FY15E will be more muted since lease expiries will be at its low of 11.3% of total GRI. Nonetheless, it also means less occupancy rate risks in light of the implementation of GST in Apr-2015 and the slew of subsidy rationalizations over the next 2-3 years. We have also assumed 100% dividend payout of distributable income. Compared to its peers, the group’s 3-yr Fwd average gross dividend yield is slightly lower at 6.1% vs. its (i) peers average of 6.4% and (ii) CMMT, its pure retail MREIT comparable, of 6.4%.

Initiating coverage on IGB REIT with MARKET PERFORM and TP of RM1.23 based on a FY14E gross yield of 6.0% (net: 5.4%) which is more aggressive than what we have applied on CMMT (6.3%) and SUNREIT (6.4%). Our TP implies 8.7% total return, which implies that the stock has already mostly priced in the better growth potentials vis-à-vis other retail-heavy MREITs. Additionally, there is relatively less acquisition visibility vis-à-vis its heavy retail-based peers like CMMT and SUNREIT. Nonetheless, we believe downside risks are limited at this juncture as our target yields have taken into account recent bond-yield volatilities.

Source: Kenanga