Not Rated Thiam Chiann Wen Tel:

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1 MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: IPO Thursday, 10 Sept 2015 FBM KLCI: 1, Sector: REIT Al-Salam Real Estate Investment Trust Fair Value: RM 1.12 Diversified Islamic REIT Main Market Listing THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Not Rated Thiam Chiann Wen Tel: cwthiam@ta.com.my Background Al-Salam REIT is a diversified Islamic REIT, which invests in various Shariahcompliant assets including commercial, retail, office and industrial assets. It has an initial portfolio of 31 assets with total asset value worth RM903.1mn. These assets are Menara hypermarket, KFCH International College and KOMTAR JBCC, which is a new retail mall in Johor Bahru city centre, and a chain of KFC and Pizza Hut restaurants and other selected industrial assets. Refer to Appendix A for details of the assets. Scheduled to be listed on 29 September 2015, Al-Salam REIT will be the 4 th Shariah-compliant REIT listed in Malaysia. Based on the IPO price of RM1.00/unit, Al-Salam REIT s market capitalization will be RM580.0mn. The trustee, Amanahraya trustee, on behalf of Al-Salam REIT has entered into SPAs to acquire properties from the vendors for a purchase consideration of RM903.1mn, which will be satisfied via the issuance of 327.6mn consideration units and cash consideration of RM575.5mn, which will be funded from listing proceeds and Islamic financing facilities. Figure 1: Trust Structure Share Information Listing Main Market Enlarged Share Capital (mn) Market RM1.00 (RM mn) Par Value (RM) 1.00 Issue price (RM) 1.00 Oversubscription rate N/A Estimated free float (%) 43.5 Tentative listing date 29-Sep-15 Tentative Listing Dates Event Tentative Date Opening of the IPO Closing of the IPO Balloting of Applications 4-Sep Sep Sep-15 Allotment of Shares 25-Sep-15 Listing 29-Sep-15 Ratio & Analysis NTA per share (post IPO) (sen) 0.98 Price to NTA (x) 1.02 Proforma ROE (%) 1.8 Proforma ROA (%) 1.1 Proforma Gearing (x) 0.38 Source: Prospectus, IPO Structure Al-Salam REIT s IPO consists of institutional offering and retail offering, totaling up to 252.4mn new units see Figure 2. The Sponsor, JCorp, will eventually own a 56.5% stake in Al-Salam REIT post IPO exercise- see Figure 3. Utilisation of Proceeds RM(mn) % Listing expenses Acquisition TOTAL Figure 2: IPO Structure Beakdown of the Offering: No. of offer units (mn) % of total Units upon listing Reta i l Offeri ng: Ins ti tuti ona l offeri ng: Total Source: Prospectus, Page 1 of 10

2 Figure 3: Estimated shareholding structure upon listing Source: Prospectus, Investment Case 1) Strategic location of properties 2) Attractive organic and inorganic growth prospects 3) Set to replicate the success of Al-Aqar REIT Strategic location of properties Komtar JBCC, Menara Mart Kempas and KFC College are all located in the core development precinct of Flagship Zone A of Iskandar Malaysia, Johor Bahru. We believe Komtar JBCC, which is opposite to the CIQ transportation hub and the JB Sentral train station (see Figure 4), is well positioned to benefit from higher tourist traffic from Singapore, given the strategic location in between the city s prime business routes of Jalan Tun Abdul Razak and Jalan Wong Ah Gook. Also, Komtar JBCC is also housing the first Angry Birds Activity Theme Park in Southeast Asia as an attraction of the mall. Figure 4: Strategic Location of Komtar JBCC Source: Al-Salam REIT, Meanwhile, QSR Properties are largely situated in proximity to middle and high income established commercial and residential areas in Malaysia see Figure 5. According to independent market research, the consumer foodservice market in Malaysia has grown rapidly with sales transactions rose from RM18.2bn in 2004 to RM33.3bn in 2013, representing a CAGR of 6.9%. Urbanisation has resulted in a shift in lifestyle and dining patterns, as Malaysians show a preference for dining out during lunch breaks and after long working hours as opposed to preparing meal at home. This trend has led to growth opportunities for consumer foodservice outlets and is expected to augur well for QSR s properties in terms of patronage. Sales transactions for consumer foodservice is expected to grow from RM33.3bn in 2013 to RM38.9bn in 2016 at a CAGR of 5.3%, based on independent market research. Page 2 of 10

3 Figure 5: Location of QSR Properties Source: Al-Salam REIT, Attractive organic and inorganic growth prospects Organic growth. With Komtar JBCC s occupancy rate of 81% and its relatively low average monthly rental rates at RM5.63psf as at June-15, we see ample rooms for organic growth on occupancy rate and rental. According to Independent Market Research, Knight Frank Research, prime retail space in Johor Bahru continued to perform well in 2014, with occupancy rates recorded in excess of 80%, commanding gross rentals ranging from RM15 psf to RM40 psf per month. As such, we believe Komtar JBCC s rentals are in a steep discount to some of its peers because it is only in its first cycle of renewals, since its opening in July Also, for any typical start-up malls, the mall operators will usually provide various incentives and rent free periods to tenants in the initial parts of the tenancies. Then, further rental upside could come from higher gross turnover rent if strong arrivals to Komtar JBCC materialize. We understand that most of KOMTAR JBCC s tenants are subject to revenue sharing scheme based on percentage of net or gross sales turnover ranging from 2-15%. Inorganic growth. We are also optimistic of Al-Salam s prospects in terms of inorganic growth opportunities, with sizable pipeline of potential assets injections by its sponsor, JCorp. Note that Al-Salam has the First Right of Refusal (FROR) to acquire the properties owned by JCorp Group. Having said that, there are some properties worth about RM800mn collectively identified for injections into Al-Salam REIT in the future, including; Kota Raya, Menara 238, Menara VSQ, Menara JCorp and other restaurant properties and non-restaurant properties owned by QSR group see Figure 6. In addition, the REIT would also explore acquisition opportunities with third parties. Over the next two years, Al- Salam aims to double its asset value to about RM2bn from RM900mn currently. Page 3 of 10

4 Figure 6: Potential Assets Injection Source: Al-Salam REIT, Set to replicate the success of Al-Aqar REIT DRMSB, the REIT manager for Al-Salam REIT, is a wholly-owned subsidiary of DASB, which in turn is a wholly-owned subsidiary of the Sponsor. DRMSB is also the REIT manager for Al-Aqar Healthcare REIT (Al-Aqar REIT). At the point of Al-Aqar REIT s listing, it was the first Islamic REIT in the world and also the first healthcare REIT in Asia. Al-Aqar REIT was established with an initial portfolio of 6 assets and has since grown to 25 assets worth approximately RM1.6bn comprising 21 hospitals and four healthcare related properties spanning across Malaysia, Indonesia and Australia. Led by the same REIT manager with rich experience in property management, we expect Al-Salam is set to replicate Al- Aqar REIT s success in capitalize on opportunities for future income and NAV growth. Page 4 of 10

5 Figure 7: Track record of the REIT manager in managing Al-Aqar REIT Source: Al-Salam REIT, Risk Asset concentration risks Komtar JBCC and Menara Komtar are expected to contributes combined 59% and 60% to the REIT s total appraised value and net property income respectively for 9M15 (30 Mar15 to 31 Dec 15). The financial performance of Al-Salam will be severely affected, should there be any unforeseen events occur in that area, such as terrorist attacks, natural disasters, gas explosion that could cause physical damage to the mall and office tower, as the REIT has high dependency on these two assets. Financial Highlights and Earnings Forecasts Al-Salam REIT has provided its net profit forecast for the financial period 30 Mar 2015 (date of establishment) to 31 Dec 2015 (EFP15) & FY16 with distributable income amounted to RM10.5mn (9-month results) and RM37.2mn (12-month results) respectively. Key assumptions management s EFP15 earnings forecasts are derived from 1) rental income and related expenses from 13 QSR properties acquired on 6 May 2015 under Phase 1 Acquisition plan; 2) rental income and related expenses arising from the remaining properties (Menara hypermarket, KFCH International College, KOMTAR JBCC and remaining 14 QSR properties) acquired on 1 September 2015 under Phase 2 Acquisition plan. We estimate FY17 total revenue to increase 7% YoY to RM85mn primarily due to higher rentals collections, as well as increase in advertising income and car park income. Note that our assumptions only account for organic growth (higher rental reversion). Balance Sheet Analysis Upon listing, based on Al-Salam REIT s pro-forma statement of financial position, it will have total indebtedness of approximately RM345.7mn, representing approximately 38% of its total asset value. For future acquisitions, Al-Salam REIT has the flexibility to borrow additional RM100mn before reaching the statutory gearing cap of 50%. As the pipeline assets worth RM800mn, management indicates that the REIT will explore various sources of financing which include additional unit issuance to existing and/or third party investors. Page 5 of 10

6 Distribution Policy Al-Salam REIT intends to distribute at least 90% of its distributable income for each subsequent financial year, on a half yearly basis. According to prospectus, Al-Salam REIT is expected to declare DPU of 1.81 sen and 6.41 sen for FY15 and FY16 respectively, based on a distribution rate of 99.9%. For FY17, we project the trust to pay out 6.9sen per unit or 99.9% of its distributable income to unitholders. This translates to DPU yield of 6.9% based on the IPO price of RM1.00. Valuation We derive our fair value of RM1.12, based on DDM valuation (cost of equity: 8.2%, terminal growth: 2.5%). At RM1.12, the implied FY16 dividend yield would work out to 5.7%, which is slightly higher than sector s target yield of 5.4%. We think this is justifiable given its small asset base and market capitalization. Earnings Summary (RM mn) FYE Dec EFP15* FY16F FY17F Total Revenue Net Property Income NPI Margin (%) Pretax profit Distributable income EPU (Sen) EPU Growth (%) N/A > PER (x) DPU (sen) Div Yield (%) ROE (%) *: Estimated Financial Period 2015 comprising 9 months performance from 30 M ar 15 (Date of establishment) to 31 Dec 2015 Source: Peers Comparison Price Target price Market Cap PER (x) Div Yield (%) P/NAV (RM) (RM) (RM bn) FY15 FY16 FY15 FY16 FY15 FY16 Sunway REIT CMMT IGB REIT* 1.30 NR Pavilion REIT* 1.52 NR KLCCP Stapled Group* 7.04 NR Axis REIT* 1.64 NR Average Al-Salam * Based on consensus number Source: Bloomberg, Page 6 of 10

7 Appendix A: Komtar JBCC Description Tenant Mix by Rental Income (%) Tenants by Rental Income (%) Tenancy Expiry Profile by NLA Major Tenants Page 7 of 10

8 Menara Komtar Description Tenant Mix By Rental Income (%) Tenants by Rental Income (%) Historical Occupancy Rates by NLA Tenancy Expiry Profile by NLA Page 8 of 10

9 @ Mart Kempas Description Tenant Mix By Rental Income (%) Tenants by Rental Income (%) Historical Occupancy Rates by NLA Tenancy Expiry Profile by NLA KFCH College Description Page 9 of 10

10 QSR Properties Description Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. forta SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of BursaMalaysia Securities Berhad) KaladherGovindan Head of Research Page 10 of 10