IGB REIT. Mid Valley Mega REIT

Transcription

1 Asia Pacific/Malaysia Equity Research REITs Rating OUTPERFORM* [V] Price (15 Oct 12, RM) 1.38 Target price (RM) 1.53¹ Upside/downside (%) 10.9 Mkt cap (RM mn) 4,692 (US$ 1,533) Enterprise value (RM mn) 5,847 Number of shares (mn) 3, Free float (%) week price range ADTO - 6M (US$ mn) 9.4 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). Share price performance Sep-12 Price (LHS) Research Analysts Tan Ting Min tingmin.tan@credit-suisse.com Rebased Rel (RHS) The price relative chart measures performance against the FTSE BURSA MALAYSIA KLCI IDX which closed at on 15/10/12 On 15/10/12 the spot exchange rate was RM3.06/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) (IGRE.KL) INITIATION Mid Valley Mega REIT Initiate with OUTPERFORM. We initiate coverage on with an OUTPERFORM rating and a target price of RM1.53. is the largest REIT in Malaysia by market capitalisation. It has arguably the best asset quality among the M-REITs in the form of Mid Valley Megamall (MVM) and Gardens Mall (GM), two of the most popular malls in the country. Our DDM-based target price of RM1.53 implies a 2013 gross yield of 4.4% and total returns of 15.6%. Why is attractive? (1) It is the largest REIT in Malaysia by market capitalisation and appraised value, and therefore deserves a size premium. (2) It leverages on the strong office and hotel population in Mid Valley City and affluent surrounding areas, resulting in very strong footfall even during the weekdays. (3) It is a pure retail play and a proxy to Malaysia s robust domestic consumption. (4) It has a proven record of solid performance occupancy and rental rates rose even during difficult times. Avenues for growth. We estimate that s Net Property Income (NPI) will grow 4-8% in FY12E-14E. There is scope for further growth via: (1) optimisation of NLA through reconfiguration of space. More scope to explore this in FY14, as the bulk of the anchor space will expire by then; (2) a pickup in rental reversions as the malls mature and the bargaining power progressively shifts to the malls; (3) s gearing is estimated at 26%, allowing for further acquisitions via debt; and (4) the company has the right of first refusal (ROFR) for IGB s future retail malls. Beneficiary of yield compression. Many Malaysian government-linked funds are particularly hungry for yields and would potentially prefer dividend yields to other valuation methodologies, fueling the yield compression story in Malaysia. should benefit from this on-going yield compression. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Net property income (RM mn) EBITDA (RM mn) Net attributable profit (RM mn) Distributable income (RM mn) EPS (CS adj.) (RM) Consensus EPS (RM) n.a EPS growth (%) P/E (x) DPU (RM) Change from previous DPU (%) n.a. DPU yield (%) P/Book (x) EV/EBITDA (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Pavilion REIT Sunway REIT CMMT Axis REIT Starhill REIT Al-Hadharah Al-'Aqar AmFIRST UOA REIT Hektar REIT ARRM QCT Tower REIT Atrium REIT 17 October 2012 Focus charts Figure 1: is the largest REIT by market cap = deserves a size premium 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Figure 2: largest retail exposure by appraised asset value (RM mn) Hektar CMMT SREIT PREIT Source: Bloomberg Figure 3: MVM has stable rental rate growth and full occupancy rates E 2013E 2014E Average Rentals (RM psf) Occupancy (%) Source: Company data, Credit Suisse estimates Figure 5: Mid Valley City provides a strong office and hotel population 101% 100% 99% 98% 97% 96% 95% 94% 93% 92% 91% 90% Retail Assets Non-retail assets Source: Company data Figure 4: Klang Valley s average prime retail rents ground or concourse floor RM psf 40 Global Financial Crisis 35 SARs Tsunami 30 Asian Financial Crisis Sept 11 attack 25 Tech bubble Source: CBRE (Note: A basket of 11 prime malls in Klang Valley) Figure 6: 2013 gross yield comparison (RM 5, % 4, % 5.0% 5.00% 4,100 3,600 3, % 4.9% 4.95% 4.90% 2,600 CMMT Sunway REIT Pavilion REIT 4.85% Market cap (RM mn) CY13 Yield Source: Media e-tawau Source: Bloomberg, Credit Suisse estimates (IGRE.KL) 2

3 Mid Valley Mega REIT Initiate coverage with an OUTPERFORM rating We initiate coverage on with an OUTPERFORM rating and a target price of RM1.53. is the largest REIT in Malaysia by market capitalisation. It has arguably the best asset quality among the M-REITs in the form of Mid Valley Megamall (MVM) and Gardens Mall (GM), two of the most popular malls in the country. Our target price of RM1.53 for provides total returns of 15.6% and is derived using a dividend discount model (DDM). The target price implies a 2013 gross yield of 4.4%. Our DDM-based target price of RM1.53 provides total returns of 15.6% Figure 7: SWOT analysis Strengths Opportunities Largest REIT in Malaysia based on market cap, appraised value, The properties are leveraged to Mid Valley City, a captive market, retail exposure. It is also the most liquid REIT so far. which results in high footfall even during weekdays. Pure retail REIT, which deserves a premium. Can gear up from the current gearing of 26% for new acquisition. Proven record of resilient performance, even during difficult times NLA optimisation may accelerate in FY14 with expiry of anchor occupancy and rental rates have been on an upward trend. tenants. A proxy to Malaysia's robust domestic consumption. A low-beta sector in a low-beta market. 100% pay-out for FY12-14E. Leverage on the IGB brand name. Affluent catchment area and proximity to various upmarket suburbs in Kuala Lumpur. Experienced management, which has seen multiple booms and busts. Corporate governance has not been an issue. Robust organic growth from existing assets. Minimal capex in the foreseeable future. Weaknesses Potential yield compression, in our opinion, due to Malaysia s special yield situation. Threats Lack of visibility of an asset pipeline from the sponsor. Competition may increase in 2015 in the Klang Valley. Strong dependence on economic conditions and consumer sentiment. REITs could underperform in a bullish stock market. One-location risk. Potential conflict of interest. Traffic congestion could be a deterrent to shoppers. Possible cash call for future asset acquisitions, in our opinion. Source: Credit Suisse estimates Most recognised malls in Malaysia MVM and GM combined have the largest retail platform in Malaysia a total NLA of 2.5 mn sf. leverages on Mid Valley City s captive office and hotel population which include seven office buildings and three hotels. This ensures that the footfall continues to be strong even during weekdays. Additionally, MVM and GM are located just some 10 km from Kuala Lumpur city centre and within the proximity of various upmarket suburbs in Kuala Lumpur which provide a catchment area with a higher purchasing power. Avenues for growth We estimate that s Net Property Income (NPI) will grow 4-8% in FY12E-FY14E. There is scope for further growth via: (1) optimisation of NLA through reconfiguration of space. There is more scope to explore this in FY14, as the bulk of the anchor space will expire by then; (2) a pick-up in rental reversions as the malls mature and the bargaining power progressively shifts to the malls; (3) s gearing is estimated at 26%, which allows for further acquisitions via debt; and (4) the company has the right of first refusal (ROFR) for IGB s future retail malls. Beneficiary of Malaysia s yield compression story Many government-linked funds in Malaysia are particularly hungry for non-sin yield and would potentially prefer dividend yields to other valuation methodologies. This is driving the yield compression story in Malaysia we have seen the yields for these stocks compress to up to 4%. is a beneficiary of the on-going yield compression trend. May invest overseas in the future steep learning curve needed. MVM and GM combined have the largest retail platform in Malaysia Net Property Income will grow between 4-8% in FY12E-FY14E. Government-linked funds in Malaysia are particularly hungry for non-sin yield, benefitting (IGRE.KL) 3

4 IGRE.KL Price (15 Oct 12): RM1.38, Rating:: OUTPERFORM [V], Target Price: RM1.53, Analyst: Tingmin Tan Target price scenario Scenario TP %Up/Dwn Assumptions Upside Central Case Downside Income statement (RM mn) 12/11A 12/12E 12/13E 12/14E Gross revenue Property expenses Real estate taxes Net property income Other income Asset mgmt. fees (exp. item) Trustee fees (exp. item) Other expenses EBITDA Net interest expense/(inc.) Investment income Associates/JV Recurring PBT Taxes Revaluations Net profit (Credit Suisse) Non-tax deductible exp. Tax deductible expenses Other adj. to distrib. inc Distributable income Cash flow (RM mn) 12/11A 12/12E 12/13E 12/14E EBIT Net interest Tax paid Working capital (0.9) (1.9) (2.1) Other cash & non-cash items (223.7) (100.8) Operating cash flow Capex Net property acq. Other investment/(outflows) (0.31) (0.60) (0.55) Investing cash flow (0.31) (0.60) (0.55) Equity raised Dividends paid (109.9) (232.5) (244.4) Net borrowings Other financing cash flow (28.0) (55.9) (55.9) Financing cash flow (137.9) (288.4) (300.3) Adjustments Net change in cash Balance sheet (RM mn) 12/11A 12/12E 12/13E 12/14E Cash & cash equivalents Short-term investments Current receivables Other current assets Current assets Property, plant & equip Investment properties 4,771 4,970 5,156 Investment in Associates/JV Other investments Other non-current assets Non-current assets 4,783 4,981 5,165 Total assets 4,843 5,042 5,227 Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt 1,193 1,193 1,193 Non-current provisions Other non-current liab Non-current liabilities 1,245 1,245 1,245 Total liabilities 1,285 1,285 1,285 Unitholder funds 3,558 3,757 3,943 Capital employed 4,803 5,002 5,187 Key earnings drivers 12/11A 12/12E 12/13E 12/14E Average rental psf for Mid Valley Average Megamall rental psf (RM/sf for Gardens Rental reversions Mall (RM/sf at Mid per Valley Rental Megamall reversions (%) at Gardens Mall (%) Per share data 12/11A 12/12E 12/13E 12/14E Shares (wtd avg.) (mn) 3,400 3,407 3,428 3,448 EPS (Credit Suisse) (RM) DPU (RM) BVPS (RM) NAV per share (RM) Key ratios and 12/11A 12/12E 12/13E 12/14E valuation Growth(%) Gross revenue Net property income Net profit (21.4) Distributable income (6.73) DPU Margins (%) NPI margin Pre-tax profit margin Net profit margin Valuation metrics (x) P/E DPU yield (%) P/B EV/EBITDA Profitability (%) ROE ROA Credit ratios Net debt/equity (%) Net debt/ebitda (x) Debt/asset (%) Interest cover (x) Source: Company data, Thomson Reuters, Credit Suisse estimates Sep Sep-12 Source: IBES 12MF P/E multiple 05-Oct-12 12MF P/B multiple 05-Oct-12 (IGRE.KL) 4

5 - Mid Valley Mega REIT Initiate with an OUTPERFORM We initiate on with an OUTPERFORM rating and a target price of RM1.53. IGB REIT is the largest REIT in Malaysia by market capitalisation, appraised asset value and retail exposure. It has arguably the best asset quality among the M-REITs in the form of Mid Valley Megamall (MVM) and Gardens Mall (GM), two of the most popular malls in the country. DDM-based target price of RM1.53 Our DDM-based target price of RM1.53 implies a 2013 gross yield of 4.4% and potential total returns of 15.6%. currently trades at a 2013 gross yield of 4.9% which is at par with CMMT and at a marginal premium to Pavilion REIT and Sunway REIT which both trade at 5.0%. Given the better asset quality of MVM and GM we believe the stock should trade at a premium to CMMT and SREIT. We discount forward distributable income by an estimated cost of equity (CoE) that, in our view, best captures s sub-sector risk as well as specific corporate risks. In calculating the CoE, we have assumed a risk-free rate of 3.5% similar to the ten-year Malaysian government bond rate and market risk premium of 6.6% based on a five-year historical average. As was only listed on 21 September 2012, we have estimated its beta by taking the average beta of the larger M-REITs with a longer track record (Sunway REIT and CMMT) and adjusting it to account for the superior asset quality of MVM and GM, resulting in a beta of 0.51x. Arguably the best asset quality among the M-REITs DDM-based target price of RM1.53 implies total returns of 15.6% Figure 8: CoE assumptions Risk free rate 3.5% Mkt Risk Premium 6.6% Beta 0.51 WACC 6.9% Terminal Growth 2.5% Terminal cap rate 4.4% Source: Credit Suisse estimates Figure 9: DDM FY2012E FY2013E FY2014E FY2015E DPU (RM) Discount Factor PV of div (RM) Discount Rate 6.9% Terminal Value in future (RM) 1.94 PV of terminal value (RM) 1.14 Implied value (RM) 1.53 Source: Credit Suisse estimates Figure 10: DDM sensitivity to beta and terminal values (RM) Terminal growth 1.5% 2.0% 2.5% 3.0% 3.5% Beta (x) Source: Credit Suisse estimates (IGRE.KL) 5

6 : A pure retail REIT, with good asset quality Figure 11: 2013 gross yield comparison (RM mn) 5, % 4, % 5.0% 5.00% 4,100 3,600 3, % 4.9% 4.95% 4.90% 2,600 CMMT Sunway REIT Pavilion REIT Market cap (RM mn) CY13 Yield Source: Bloomberg, Credit Suisse estimates 4.85% Figure 12: M-REIT valuation comparisons Calendarised Ticker Asset type Price (RM) Mkt Cap (RM mn) Div yield (%) PE P/B Rat IGRE.KL Retail ,692 O/P 4.7% 4.9% Pavilion REIT PREI.KL Retail ,146 O/P 4.8% 5.0% Sunway REIT SUNW.KL Diversified ,102 N 5.0% 5.0% CMMT CAMA.KL Retail ,200 O/P 4.7% 4.9% Starhill REIT SRHL.KL Hospitality ,391 NR 7.9% 9.3% Axis REIT AXSR.KL Office ,392 NR 6.0% 6.1% Al-Hadharah ALHD.KL Plantation ,248 NR 5.9% 6.3% Al-'Aqar ALQA.KL Healthcare ,003 NR 5.8% 5.9% UOA REIT UOAR.KL Office NR 7.7% 8.0% ARRM AMRY.KL Diversified NR 7.8% 8.1% AmFIRST AMFL.KL Office NR 6.4% 6.0% Hektar REIT HEKR.KL Retail NR 7.2% 7.4% QCT QCAP.KL Office NR 7.2% 7.5% Tower REIT TWRE.KL Office NR 7.7% 8.0% Atrium REIT ATRL.KL Industrial NR 6.7% 7.0% Source: IBES consensus, Credit Suisse estimates Although is one of the most expensive REITs in the M-REIT sector, we believe this is justified as: s portfolio is pure retail which should command a premium as retail earnings tend to be more resilient compared to other sectors and mixed REITs. MVM and GM are two of the most popular malls in Malaysia. They feed off the captive office and hotel population in Mid Valley City and are within proximity to several affluent neighbourhoods. MVM and GM have a strong grip on the surrounding captive population as the closest real competition would come from Sunway Pyramid and 1Utama which are over 10 km away. The closer malls are primarily neighbourhood malls which are significantly smaller, and do not offer the range of products that can offer., PREIT, CMMT and SREIT are arguably the only investible REITs in Malaysia. While the other REITs may offer higher yields of 6-8%, they are substantially more illiquid, and are generally off the radar screen for foreign investors. Premium valuations are justified (IGRE.KL) 6

7 Cheapest P/B among the big cap REITs scores well on a P/B basis among the big caps. Figure 13: CY2013 P/B comparison 1.55 Cheap on 2013 P/B Sunway REIT Pavilion REIT CMMT Source: Credit Suisse estimates (IGRE.KL) 7

8 Pavilion REIT Sunway REIT CMMT Axis REIT Starhill REIT Al-Hadharah Al-'Aqar AmFIRST UOA REIT Hektar REIT ARRM QCT Tower REIT Atrium REIT Sunway REIT Pavilion REIT CMMT Starhill REIT Axis REIT Al-Aqar KPJ REIT Al-Hadharah AmFIRST UOA REIT ARRM Hektar REIT Quill Capita Tower REIT Atrium REIT 17 October 2012 Why is attractive? (1) The largest REIT: Size premium is the largest Malaysian REIT ranked by (1) Market capitalisation (RM4.8 bn as of 15 October 2012). Being the largest REIT, it will be given a liquidity premium as we have seen in Pavilion REIT, CMMT and Sunway REIT versus the small cap REITs listed on Bursa Malaysia. (2) Appraised value (RM4.6 bn). (3) Retail exposure by asset value in Malaysia. We expect the market to reward IGB REIT for being a pure retail play and for its size. (4) It is the most liquid REIT (even after excluding the first week of trading). Largest REIT by market cap, asset value, and retail exposure. The most liquid REIT in Malaysia. Figure 14: largest REIT in Malaysia by appraised value Figure 15: largest retail exposure by appraised asset value in Malaysia (RM mn) Hektar CMMT SREIT PREIT Source: Credit Suisse estimates Figure 16: is the largest by market capitalisation Retail Assets Source: Credit Suisse estimates Non-retail assets 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Source: Bloomberg, Credit Suisse estimates (IGRE.KL) 8

9 CMMT Sunway REIT Pavilion REIT Al-'Aqar Starhill REIT Axis REIT AmFIRST Al-Hadharah Hektar REIT ARRM QCT UOA REIT Tower REIT Atrium REIT 17 October 2012 Figure 17: : is the most liquid (excluding the first week of trading) Source: Bloomberg (2) Potentially the most recognised malls in Malaysia MVM and GM combined have one of the largest retail platform in Malaysia. Additionally, although GM is a premium mall, Pavilion and Suria KLCC are not direct competitors due to their location in the city centre. For MVM, we believe the only real competitors are the privately held 1 Utama and Sunway Pyramid (part of Sunway REIT), which are of similar size. The other malls around the Mid Valley City area are primarily neighbourhood malls that are significantly smaller, and do not offer the range of products that offers. Other malls around the Mid Valley City area are primarily neighbourhood malls Figure 18: MVM and GM together are the largest in Malaysia Size Distance from Name Location (mn sf) Target market Mid Valley City (km) Mid Valley Megamall Mid Valley City 1.72 Mass & upper-mid The Gardens Mid Valley City 0.82 Luxury Berjaya Times Square KL City 2.10 Mass & upper-mid Utama Bandar Utama (Suburb) 1.98 Mass & upper-mid 11.4 Sunway Pyramid Bandar Sunway (Suburb) 1.56 Mass & upper-mid 13.5 Pavilion Kuala Lumpur Mall KL City 1.34 Luxury 6.9 Suria KLCC KL City 1.16 Luxury 8.7 Sungei Wang KL City 0.73 Mass & upper-mid 7.2 The Mines The Mines (Suburb) 0.72 Mass & upper-mid 15.6 Paradigm Kelana Jaya (Suburb) 0.70 Mass & upper-mid 13.8 Subang Parade Subang (Suburb) 0.47 Mass & upper-mid 13.3 Tropicana city mall Petaling jaya 0.45 Mass & upper-mid 9.2 Starhill Gallery KL City 0.36 Luxury 7.3 Empire Gallery Subang (Suburb) 0.35 Mass & upper-mid 15.0 Publika Dutamas 0.34 Mass & upper-mid 11.5 Bangsar shopping Centre Bangsar 0.33 Mass & upper-mid 4.5 Bangsar village 1&2 Bangsar 0.30 Mass & upper-mid 2.8 Lot 10 KL City 0.26 Mass & upper-mid Mont Kiara Mont Kiara 0.25 Mass & upper-mid 10.0 Source: Company data, Credit Suisse estimates (IGRE.KL) 9

10 Figure 19: Malls within 5 km of Mid Valley Megamall Bangsar Shopping Centre Bangsar Village 1 & 2 Mid Valley Megamall & Gardens Amcorp Mall Source: Company data (3) Proven track record Occupancy rates have remained consistently high at MVM and GM. The average monthly rental rate per sf of MVM has been increasing, from RM9.22 in 2009 to RM9.69 in 2010 and RM10.21 in The same upward trend is seen in case of GM, from RM7.32 in 2009 to RM7.54 in 2010 and RM8.43 in It is worth noting that both occupancy and rental rates remained resilient in 2009 despite the significant fresh supply of retail space in , due to the completion of GM, Sunway Pyramid Phase 2, Pavilion Mall and 1 Utama New Wing, and the global financial crisis in 2008/09. Occupancy rates have remained consistently high Figure 20: MVM has stable rental rate growth and full occupancy rates E 2013E 2014E Average Rentals (RM psf) Occupancy (%) 101% 100% 99% 98% 97% 96% 95% 94% 93% 92% 91% 90% Figure 21: GM has robust rental rate growth and almost full occupancy rates % % % % % % E 2013E 2014E Average Rentals (RM psf) Occupancy (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 22 and Figure 23 show that rental rates for prime malls in Kuala Lumpur are on an upward trend. MVM and GM, both being prime retail malls, show resilient rental rates and occupancy even during difficult times. We have used Sunway Pyramid Shopping Mall as an example. Its occupancy and rental rates were on an upward trend even during the 1998 and 2008 recessions, which reaffirms our faith in the resilience of successful malls. Rental rates for prime retail malls in KL are on an upward trend, even during difficult times (IGRE.KL) 10

11 Another impressive achievement is that rates did not fall in , despite the completion of GM, Sunway Pyramid Phase 2, Pavilion Mall and 1 Utama New Wing. Figure 22: Klang Valley s average prime retail rents ground or concourse floor RM psf Figure 23: Sunway Pyramid s rental rates are resilient even during difficult times RM psf 40 Global Financial Crisis 10 Global Financial Crisis Asian Financial Crisis Tech bubble Sept 11 attack SARs Tsunami Sept 11 attack Tech bubble SARs Tsunami Source: CBRE (Note: A basket of 11 prime malls in the Klang Valley) (4) Leveraging off Mid Valley City The two malls are located in the 50-acre Mid Valley City, which has Source: Company data Three hotels with 1,683 rooms and an occupancy rate of at least 75%. Seven commercial office buildings spanning over 2.6 mn sf of NLA. MVC has been designated as a Multimedia Super Corridor Centre, which has attracted more tenants from the technology sector. IGB has commenced work on a new project called Mid Valley City Southpoint, a mixed office and retail development which is expected to be completed around This should add more workers to MVC, and provide additional traffic to MVM. Being within an integrated city has its advantages, including: Creating a captive shopper population irrespective of the day of the week. This captive market supports strong footfall even during the weekdays, as opposed to on weekends alone. Hence, from our channel checks, the two malls appear to be busier than most other malls during the weekdays. CBRE estimates that there is an office population of 14,547 within MVC and an office population of 102,819 in the secondary areas. The last phase of MVC involves an office tower which should be completed in late 2015 and should add more footfall to MVM. Maximising the usage of car parks. During the weekdays, the car parks in Mid Valley City are used primarily by office workers. Meanwhile, during the weekends, shoppers populate the office building car parks. There are more than 10,220 car park bays in MVC. Figure 24: Office population within 5 km drive distance NLA Estimated occupied Estimated office Office population within 5km (mn sf) space (mn sf) population Mid Valley City ,547 Secondary Area ,819 Total ,365 Note: Secondary Area includes KL Sentral, Bangsar, Bangsar South, Pantai/Kerinchi, Old Klang Road, part of Damansara Heights, part of PJ, part of CBD; Source: CBRE MVC creates a captive shopper population and ample car bays (IGRE.KL) 11

12 Figure 25: Mid Valley City provides a strong office and hotel population Source: Media e-tawau (5) Affluent catchment area MVM and GM are located just some 10 km from Kuala Lumpur city centre and within the proximity of various upmarket suburbs in Kuala Lumpur, including Bangsar, Damansara Heights, Seputeh and Petaling Jaya residential areas. These provide for an affluent catchment area with higher purchasing power. Surrounding affluent catchment area include Bangsar, Damansara Heights and Seputeh (IGRE.KL) 12

13 Avenues for further growth Organic growth from current assets There is scope for organic growth from the malls via pick-up in rental reversions, and enhancement of NLA and rental revenue. Recent examples of this include the reconfiguration of the 39k sq ft MPH space on the ground floor of MVM. MPH was moved to the lower ground floor to make way for Uniqlo (16k sq ft), Forever21 (20k sq ft) and a Mango expansion (3k sq ft). We understand that rentals tripled vs rates under MPH. This underlines management s capability to optimise NLA. Optimisation of NLA via reconfiguration of existing space: MVM and GM house five anchor department stores/supermarkets, which account for 38% of NLA. The bulk of these will expire in FY14, providing opportunities for optimisation of space. We believe that the mall managers will have room to move tenants around, adjust their space accordingly and renegotiate rental rates to optimise their rental revenue. Optimisation of NLA MPH was recently moved to the lower ground floor and rentals have tripled under new tenants Bulk of anchor space expire in FY14 Possible expansion of NLA: The malls have a blended efficiency ratio of 26.7% (defined here as NLA/GFA). This will facilitate to explore other opportunities for enhancing NLA and rentals, including creating additional spaces where possible, via the use of push carts and kiosks, and using otherwise empty space as rental-yielding store rooms. A pick-up in rental reversions? In our forecasts, we have assumed a rental reversion of 12% for MVM and 15% for GM in 2013, which should be achievable as Pavilion Mall and Sunway Pyramid have recorded rental reversions of 10 15% and 15 17% in 2011 and 2012 YTD, respectively. Rental rates should continue to rise at both MVM and GM, as their bargaining power increases with maturity. Rental rates of successful malls such as MVM and GM should remain resilient even during difficult times, such as the Asian Financial Crisis in 1997, the tech bust in 2001, and the Global Financial Crisis in Demand for space at MVM is evidenced by the waiting list for new space that is still in excess of two years. According to CBRE, the highest rent psf is still below RM60 versus rents in the city centre which have exceeded RM100 psf, suggesting that there is room for further rental rate growth. Figure 26: Klang Valley s average prime retail rents ground or concourse floor RM psf Figure 27: Sunway Pyramid s rental rates are resilient even during difficult times RM psf 40 Global Financial Crisis 10 Global Financial Crisis Asian Financial Crisis Tech bubble Sept 11 attack SARs Tsunami Sept 11 attack Tech bubble SARs Tsunami Source: CBRE (Note: A basket of 11 prime malls in Klang Valley) Source: Company data (IGRE.KL) 13

14 Room to gear up for expansion s debt-to-asset ratio is 26%, which is significantly below the limit of 50% of the total asset value under the Malaysian REIT guidelines. This should give the flexibility to consider pursuing further acquisitions via debt, as a means of growing its asset size. Based on a debt-to-asset ratio of 50.0%, could raise up to RM1.1 bn of additional debt to fund future acquisitions. Gearing of 26% provides headroom for future expansion Figure 28: debt-to-asset ratio of 26% 60% 50% Figure 29: Incremental leverage at varying gearing levels (RM mn) 1,200 40% 1,000 30% % 600 1,130 10% % Pavilion REIT M-REIT average CMMT SunREIT Maximum per REIT guidelines % 35% 40% 45% 50% Source: Company data, Bursa ROFR from IGB Source: Credit Suisse estimates holds a general right of first refusal (ROFR) for IGB s future retail developments. However, we do not believe this will be exercised in the short term. What could potentially be relevant? ROFR from IGB, but no plans in the short term IGB is building a Johor Mid Valley City. We understand that construction is expected to start by the end of 2013 and will take five years to complete; however, the plans are still being negotiated. IGB has also expressed interest in two possible large mixed-use developments in Taiwan and the UK, as well as a potential Mid Valley City in Penang. (IGRE.KL) 14

15 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Maybank Maxis Pos Malaysia Bursa BSToto CIMB Group Public Bank SunREIT Pavilion REIT Alliance FG CMMT BAT Digi YTL Power PetChem 17 October 2012 Malaysia s yield compression story continues Figure 30: Malaysian market s top dividend yielding stocks for CY13 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Source: Bloomberg, Credit Suisse estimates The Malaysia domestic funds management industry has been growing faster than Malaysian market s capitalisation. Many government-linked funds are particularly hungry for non-sin yield and would potentially prefer dividend yields to other valuation methodologies. Many government-linked funds are particularly hungry for non-sin yield Malaysia s special yield situation, as clearly seen with BAT and Telekom, dictates that a company with a clear dividend message could be evaluated on yields. The yields for these stocks are usually compressed to up to 4%, even with low growth potential. Figure 31: Yield compression Telekom Malaysia % 7.0% 6.0% 5.0% 4.0% 3.0% 12m Fwd PE 12m FWD Yield Source: Bloomberg, Credit Suisse estimates We have also seen a clear trend of yield compression for the big cap Malaysian REITs which have all outperformed since their listings and year-to-date. Evidence of yield compression for M-REITs (IGRE.KL) 15

16 Figure 32: Yield compression of the big cap REITs in Malaysia Institutional Absolute Relative Absolute Relative Listing IPO Price performance performance performance performance date Price (RM) (RM) since listing since listing YTD YTD Sunway REIT 8-Jul % 42.8% 21.6% 13.5% Pavilion REIT 7-Dec % 41.6% 26.6% 18.5% CMMT REIT 16-Jul % 57.0% 25.7% 17.6% Source: Bloomberg Figure 33: Yield compression Sunway REIT s share price vs 12-month forward gross yield (RM) Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Sunway REIT share price (RM) 12m Fwd Gross Yield (%) 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% Figure 34: Yield compression Pavilion REIT share price vs 12-month forward gross yield (RM) % % % % % % Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Pavilion REIT share price (RM) 12m Fwd Gross Yield (%) Source: Bloomberg, Credit Suisse estimates Bloomberg, Credit Suisse estimates Due to the quest for yields, the dividend stocks with strong cash flow-generation capability have performed significantly well and have outperformed property developers. Figure 35: Absolute performance of high dividend yielding REITs vs high-beta property stocks YTD 40.0% Dividend plays with strong cash flow-generation capability have outperformed 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% UEM Land IJM Land SP Setia Sunway REIT CMMT Pavilion REIT Source: Bloomberg (IGRE.KL) 16

17 Key earnings drivers Net property income is expected to grow at a steady FY12 14 CAGR of 5.5% We forecast net property income to grow 7.8%, 4.6% and 4.2% in FY12, FY13 and FY14, respectively, driven by: NPI is expected to see a CAGR of 5.5% A steady increase in rental rates. Full occupancy. An increase in NPI margins as the malls mature. We have assumed that blended NPI margins will inch from 67.6% to 68.5% from FY12 to FY14. Figure 36: MVM s NPI and NPI margins Figure 37: GM s NPI and NPI margins % % % 72% 71% 70% 69% 68% 67% % 50% 40% 30% 20% 10% E 2013E 2014E 66% E 2013E 2014E 0% NPI (RM mn) NPI Margins (%) NPI (RM mn) NPI Margins (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 38: s NPI and blended NPI margins % 68% 66% 64% 62% 60% Strongest NPI growth in FY E 2013E 2014E NPI (RM mn) NPI Margins (%) 58% Source: Company data, Credit Suisse estimates We expect the strongest NPI growth to occur in FY12 at 7.8%, as 35% (based on FY11 gross rental income) of the leases at MVM will expire this year. (IGRE.KL) 17

18 Figure 39: Tenancy expiry profile of MVM (RM psf) Figure 40: Tenancy expiry profile of GM (RM psf) 14 60% 14 80% % 40% 30% 20% % 60% 50% 40% 30% 20% 2 10% 2 10% - 0% % of NLA expiring Rental rates of expiring tenancies (RM psf) - 0% % of NLA expiring Rental rates of expiring tenancies (RM psf) Source: Company data Rising bargaining power should drive rental rates up Source: Company data We expect rental rates at both MVM and GM to rise, as their bargaining power increases with maturity. We have assumed that rental reversions of MVM and GM will rise 12% and 15% YoY, respectively, for FY13. We believe this is achievable as Pavilion Mall and Sunway Pyramid have recorded rental reversions of 10 15% and 15 17%, respectively, in 2011 and Lease structures work on a 3+3 year basis, with fixed base rentals for three years, and this gets renegotiated at market rates at the end of the third year for the next three years. Tenancy expiry profile for MVM is spread out evenly, while 53% of GM s NLA will expire in FY13. Close to full occupancy at MVM and GM Rental rates should rise as the bargaining power shifts to the hands of the malls Lease structures work on a 3+3 year basis Figure 41: Occupancy rates MVM, GM and mid- and mass-market malls average 102.0% 100.0% 98.0% 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% 82.0% 80.0% 100.0% 99.9% 99.6% 100.0% 98.2% 96.7% 91.4% 93.8% % Gardens Mid Valley Megamall Mid-Mass Market Mall Note: CBRE utilised a sample of 48 mid and mass market malls including 1 Utama, Sunway Pyramid, Sungei Wang Plaza, Berjaya Times Square and Bangsar Shopping Centre. Source: Company data, CBRE. (IGRE.KL) 18

19 Both MVM and GM have recorded close to full occupancy since 2009, which is significantly better than the average mid- to mass-market malls. We expect occupancy rates at MVM and GM to remain at 2011 levels of 100% and 99%, respectively, due to their strategic location in Mid Valley City (estimated 117,000 office population, connectivity to a network of highways and major roads) and the lack of strong competition in the foreseeable future. Close to full occupancy since 2009 s net gearing s loans are as follows: FRTL a fixed rate term loan facility of up to RM1.2 bn. This carries a fixed interest rate of 4.5% p.a. for the first five years. If this is extended, rate for the sixth and seventh year shall be stepped up to 5.1% p.a. 99% of loans are on fixed rate SBRC a standby revolving credit facility of up to RM100 mn, which bears a floating interest rate of aggregate KLIBOR and a margin of 0.7% p.a. (So far, has only drawn down RM12.6 mn). We forecast that its finance cost will make up % of profit before interest in FY12 14, based on the following assumptions: (1) no major acquisitions; (2) KLIBOR rates remain flat at 3.4% and (3) RM7 mn debt transaction cost is amortised over five years. We forecast that its gearing (total debt as a % of TAV) will be 25.8%, 23.9% and 23.1% in FY12, FY13 and FY14, respectively, versus the maximum of 50% allowed by the REIT regulation. We forecast net gearing of 26% in FY12, 24% in FY13 and 23% in FY14 Figure 42: s gearing 27% 26% 25% 24% 23% 22% 21% 2012E 2013E 2014E Source: Credit Suisse estimates Payout of 100% on a half-yearly basis 100% of distributable income will be paid out until FY14 on a half-yearly basis, after which management will pay out at least 90%. Note that M-REITs are not taxed as long as they pay a minimum of 90% profits as dividends. 100% payout till FY14 on a half yearly basis No major capex We do not expect any major capital expenditure in FY Capex associated with asset enhancement initiatives (AEIs) are expensed off in the P&L. Minimal capex (IGRE.KL) 19

20 Managers base and performance fees are 0.3% of TAV and 5% of NPI, respectively Managers are entitled to a base fee of 0.3% of TAV and performance fee of 5% of NPI, which may be paid in cash or units or a combination of both. Management has stated that management fees will be paid in 100% units for FY12 and FY13 after which, this may change. We have assumed that management fees will be paid in 100% during FY Assumed management fees to be paid in 100% units Interestingly, charges an overall higher management fee versus the other large REITs in Malaysia. The difference lies in the performance fee CMMT employs a performance fee of 4.75% of NPI, while Sunway REIT and Pavilion REIT provide for 3.0% of NPI. s performance fee is 5% of NPI. Figure 43: Management fee structure Pavilion REIT Sunway REIT CMMT Base fee (% of TAV) 0.3% (up to 1%) 0.3% 0.3% 0.3% Performance fee (% of NPI) 3.0% (up to 5%) 3.0% 4.75% 5.0% Payments in units (% of total management fees) 50% (15-50%) 50% >50% (performance fee paid in units) 100% Source: Company data Potential upside to our NPI forecasts We believe that there is room for potential increases in our NPI forecasts for the following reasons: Optimisation of space should lead to higher rental rates, such as that seen at MPH in MVM, which was replaced by several smaller retail units (Uniqlo, Forever 21 and an extension of Mango). MVM and GM house five anchor department stores/ supermarkets which account for 38% of NLA, and the bulk of these will expire in FY14, providing opportunities for optimisation of space and a renegotiation of the rental rates. Together MVM and GM derive 13% of their gross rental income from percentage rent (percentage rent or turnover rent is calculated based on percentage of the total gross sales generated by each tenant). This is relatively high compared to Sunway Pyramid and Pavilion at less than 5%, which suggests that has a higher leverage to rising retail consumption in Malaysia which could surprise on the upside, with the rising affluence. There could be new rental space being carved out at MVM and GM through more asset enhancement initiatives, such as putting up more kiosks and converting some common areas into lettable areas. NLA optimisation may accelerate in FY14 with expiry of anchor tenants Percentage rent may surprise on the upside GM might see higher-than-expected NPI margin expansion. GM s NPI margins grew from 45% in 2010 to 59% in We believe there is more room for upside as Pavilion mall, Sunway Pyramid and MVM record NPI margins of over 70%. NPI margins are expected to improve as the mall matures. NPI margins at GM might improve Improving public transport such as the MRT 2 Circle line should enhance links between Mid Valley City and Mont Kiara, Sentul Timur, Ampang and Matrade, widening the catchment area of the malls. Other assumptions We have assumed that FY12 Other income will grow by 2% YoY due to higher rental income from kiosks, higher cost recovery for utilities, higher car park collection income from the additional issuance of season passes in FY12 and a 50% increase (effective 1 April 2012) in car park season passes (season passes make up 25% of total car park income). We expect advertising and promotional income to increase by 2% p.a. (IGRE.KL) 20

21 Figure 44: Key operational assumptions for 2009A 2010A 2011A 2012E 2013E 2014E Mid Valley Occupancy rate (%) Average rent (RM psf/month) Average rent growth (%) % NLA of expiring tenants (sf) NPI margin (%) Gardens Occupancy rate (%) Average rent (RM psf/month) Average rent growth (%) % NLA of expiring tenants (sf) NPI margin (%) Managers fee Total asset value (RM mn) 4,843 5,042 5,224 Base managers fee (RM mn) Net property income (RM mn) Performance fee (RM mn) Borrowings Total debt (RM mn) 1, , ,205.6 Average cost of borrowings (%) Overnight policy rate (year-end) (%) Payout policy (% of distributable income) Source: Company data, Credit Suisse estimates (IGRE.KL) 21

22 Key risks Company-specific risks Lack of acquisition pipeline visibility Although holds the ROFR for the retail assets of IGB Corp, there are no visible assets which could be injected into the REIT in the near term. The most obvious assets which could be injected would be the retail assets from the Mid Valley City in Johor, however, construction is only expected to start at end In the near term, would have to seek out third-party acquisition opportunities rather than rely on their ROFR, but management will need to compete with other REITs which are also looking to expand. One-location risk Both of s malls are located in MVC. This increases s risk should unforeseen circumstances result in a fall in MVC s popularity. Traffic congestion The roads around MVC are often congested during peak hours; this discourages traffic to the mall. In addition, footfall is heavily correlated to the availability of car park bays, and as such, the car park bays are usually full during weekends. Footfall may be restricted in the future if the number of car parks does not increase. The traffic congestion deters some shoppers from visiting the malls. IGB management has indicated that a new office building will be completed within the MVC in late 2015 and this will come with some 2,000 new carpark bays, a 20% increase from the number of carpark bays Competition from new malls According to CBRE, the cumulative supply of retail space in the Klang Valley stands at 46.1 mn sf in 2011; mass market malls contribute 92.3% of total supply as at end MVM and GM together contribute over 2.5 mn sf, representing 5.4% of total retail space. Eleven malls with an NLA of 4.1 mn sf were completed in 2011, and CBRE expects 23 malls with total NLA of mn sf to be completed in the Klang Valley until 2015 (on average 3.2 mn sf per year). Minimal pipeline visibility from the sponsor May be too inclined to MVC Traffic congestion is a deterrent to shoppers Rising supply from new malls Seven out of the 23 malls (4.06 mn sf) will be situated in Kuala Lumpur. The remaining 8.69 mn sf of NLA will be contributed from 16 mid- and mass-market malls in Selangor. We do not expect any new premium fashion malls to be opened before 2015, with the exception of the extensions to Pavilion Mall (+300,000 sf) and Suria KLCC (+450,000 sf). This will result in the two malls having enlarged sizes of 1.56 mn sf and 1.61 mn sf, respectively. Nine malls will be over 500,000 sf of NLA, including Nu Sentral (650,000 sf NLA), Atria Shopping Gallery (660,000 sf), Setia City Mall (700,000 sf), Paradigm (700,000 sf), Sunway Velocity Mall (850,000 sf), Empire City (1,000,000 sf), i-city Mall (1,000,000 sf), Boustead Jalan Cochrane (1,200,000 sf) and IOI City Mall (1,350,000 sf). While some may worry about the surge of new supply, the retail is an industry predicated on the ability to distinguish one mall from another. There will be a two-tier market underperforming older malls will see rental pressures, while successful malls such as Sunway Pyramid, 1 Utama, Suria KLCC and MVM have enjoyed rental increases for decades and should continue to enjoy rental increases. Two-tier market successful malls should continue to enjoy rental increases (IGRE.KL) 22

23 Possible cash call for future acquisitions As Malaysian REITs are allowed to increase their gearing to 50%, should be able to raise some RM1.1 bn if it needs to gear up to 50%. Any major acquisition of assets will likely require a cash call, which is usually in the form of a rights issue or a placement of new shares. In most cases, REITs prefer a rights issue over a placement so as to avoid a dilution in the stake of all current shareholders. Possible fund-raising exercise for future acquisitions Competition from IGB relating to property acquisitions A conflict of interest may arise among, the Manager and or its subsidiaries in the future. Potential conflict of interest IGB Corp may be engaged in the investment of and the development, management and operation of retail properties which may compete with s malls. IGB Corp may in the future manage or invest in other REITs or other vehicles that may also compete directly with. The Manager may in the future recommend that acquire additional properties used primarily for retail purposes from IGB Corp and its subsidiaries. There can be no assurance that the negotiations will be at arm s length. We believe that IGB s interest is aligned to, as IGB owns 51% of. Overseas investments s current malls are both located in Malaysia, but it may look to invest overseas. Investing in a foreign country usually requires a sharp learning curve. Electricity rates may be revised up There is a general expectation that electricity rates will be revised up in Malaysia in the medium term. There are no specific provisions in the leases to allow to pass on such raised electricity rates to tenants. This could erode profitability in the short term, although, in most cases, the increased electricity rates are passed on to tenants by increasing the service charge over a period of time. MVM and GM s service charge of RM1.50 psf and RM2.50 psf have not been revised up for many years and is ripe for an upward revision should the need arise. Macro risks Strong dependence on economic conditions and consumer sentiment s profitability is a function of Malaysia s economic health and consumer sentiment, which will have a significant impact on occupancy, rental rates, the health of its tenants and the ability to raise financing for future acquisitions. MVM has historically proven to be incredibly resilient during difficult economic times. Credit Suisse revised down its 2012 and 2013 global GDP growth expectations to 3.3% and 3.8% (from 3.4% and 4.0%), respectively. We think there is little prospect of falling back into a great recession abyss, but there is also little prospect regrettably of getting back to the boom-like near-5% global growth any time soon. In Malaysia, Credit Suisse expects GDP growth of 4.7% and 4.8% for 2012 and 2013, respectively. If the Eurozone crisis deepens, Malaysia, which is a relatively open market, would feel the heat of a global economic recession. REITs underperform in a bullish market In general, REITs are seen as defensive investment vehicles with low beta. Should there be a sharp increase in investor risk appetite, REITs may not perform well relative to the FBMKLCI (Footsie Bursa Malaysia Kuala Lumpur Composite Index) in a bullish stock market. Foreign investments usually require a steep learning curve A hike in electricity rates may not be passed down to the tenants immediately Risks: strong dependence on the economy, competition in the office space REITs are low beta and defensive (IGRE.KL) 23

24 Financial summary Figure 45: s P&L Year-end 31 Dec (RM mn) FY2010 FY2011 FY2012E* FY2013E FY2014E Revenue Mid Valley Gardens Other income Total revenue Property expenses (128.0) (125.0) (129.6) (130.5) (135.3) Mid Valley Gardens Net property income Interest & other income Managers fee base (13.9) (14.7) (15.2) Managers fee performance (13.5) (14.1) (14.7) Trustee fee (0.3) (0.3) (0.3) Other trust expenses (2.0) (2.0) (2.0) Finance cost (55.9) (55.9) (55.9) Fair value gain of investment properties Profit After Tax Profit after tax ex gain on inv prop Add: non-cash items Distributable income Growth Revenue growth 5.9% 8.5% 6.4% 3.3% 4.0% NPI growth 7.8% 14.9% 7.8% 4.6% 4.2% PAT growth 6.0% 5.4% Distributable income growth 5.8% 5.1% Other ratios NPI margin 63.0% 66.7% 67.6% 68.4% 68.5% PAT margin 47.0% 48.3% 48.9% Interest turnover *2012E is for comparison purposes only. We have annualised the 6 month period and assumed operates in a REIT structure from 1 January Source: Company data, Credit Suisse estimates (IGRE.KL) 24

25 Figure 46: s balance sheet Year-end 31 Dec (RM mn) FY2012E* FY2013E FY2014E Assets Non-current assets Investment properties Mid Valley 3, , ,881.6 Gardens 1, , ,273.9 Plant & Equipment Total non-current assets 4, , ,165.5 Current assets Unamortised incentives Cash & Bank balances Total current assets Total assets 4, , ,227.4 Financed by: Units 3, , ,470.8 Reserves Unitholders' fund 3, , ,942.5 Non-current liabilities Borrowings 1, , ,193.0 Tenant deposits Total non-current liabilities 1, , ,245.0 Current liabilities Borrowings Tenant deposits Total current liabilities Total unitholders' fund & liabilities 4, , ,227.4 **2012E provides a summary of s balance sheet upon establishment (1 st July 2012). Source: Company data, Credit Suisse estimates Figure 47: s cash flow statement Year-end 31 Dec (RM mn) FY2012E FY2013E FY2014 Profit before tax Payments in units Change in fair value of inv. properties - (162.5) (148.3) Amortization of Fit out incentives Depreciation of PPE Borrowing costs Interest income Others Working capital adjustments 70.2 (1.9) (2.1) Cash flow from operating activities Capex Acquisition (4,600.0) - - Interest received Others - (0.6) (0.5) Cash flow from investing activities (4,600.0) (0.6) (0.5) Proceeds/(outflow) from issue of units 3,355.0 (0.0) (0.0) Proceeds/(outflow) from loans 1,205.6 (0.0) (0.0) Interest income/(expense) (55.9) (55.9) (55.9) Distribution to unit holders (219.8) (232.5) (244.4) Others Cash flow from financing activities 4,284.8 (288.4) (300.3) Net change in cash & cash equivalents Cash & cash equivalents at beginning of the year Forex Cash & cash equivalents at end of the year Source: Company data, Credit Suisse estimates (IGRE.KL) 25

26 Appendix 1: Background info Malaysia s most recognised malls Figure 48: Mid Valley Megamall Source: Company website Figure 49: The Gardens Mall Source: Company website is a pure retail REIT with two shopping malls, Mid Valley Megamall (MVM) and the Gardens Mall (GM), with a total appraised value of RM4.6 bn. The malls are located at Mid Valley City (MVC), one of the best recognised locations in the Klang Valley, in our opinion. is a pure retail REIT with two prime malls Mid Valley Megamall and The Gardens Mall (IGRE.KL) 26