1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Malaysia Industry Focus Malaysia REIT Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Jun 2016 Guarded outlook 2QCY16 to be a challenging quarter; weak consumer sentiment is the prevailing impediment TPs raised on lower risk-free rate assumption given riskoff environment and continued easy monetary stance Selective BUY of M-REITs with robust asset portfolio: SunREIT, CMMT, PavREIT In-line 1QCY16. Overall REITs rental income remained steady with flattish growth due to moderate reversions and the current weak consumer sentiment. Reversions from retail assets are resilient with most REITs recording positive NPI growth. However, the hospitality and office segments continued to struggle in filling up vacancies. The moderate organic growth experienced was also due to the higher base effect from pre-gst spending. In order to grow further, the majority of the REITs under coverage are looking into potential acquisitions with immediate earnings accretions to boost NPI and DPU. 2QCY16 headwinds. We foresee 2QCY16 to be challenging as it is typically a weak quarter, coupled with the continued weak consumer spending. We expect to see the following prevailing challenges in 2QCY16: 1) weak consumer spending to affect the retail segment, 2) oversupply of office space, and 3) weaker hotel segment due to seasonally softer demand. A positive surprise in 2QCY16 s earnings will be an indicator of a recovery in consumer sentiment. That being said, we have incorporated the weak/negative reversions and poor occupancies of underperforming assets in our portfolio. As such, we believe the fundamentals are intact given that major earnings risks have been accounted for, and the majority of our estimates are conservative compared to consensus. TP revision on lower risk-free rate assumption. Given the prevalent risk-off environment particularly following the Brexit and expectation of continued easy monetary policies, our house risk-free rate assumption (based on 10-year MGS yield) has been lowered to 4.0% (from 4.3%). Accordingly, the TPs of REITs within our universe have been raised by 6-15%. Nonetheless, we maintain our stock recommendations. Selective picks. We continue to like Sunway REIT for its diversified segmental asset portfolio and acquisition pipeline, CMMT for its dispersed retail presence in the Klang Valley, Penang and Kuantan, as well as Pavilion REIT for its expanding prime retail asset portfolio. KLCI : 1,629.52 Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com STOCKS Source: AllianceDBS Research KLCCP Stapled Group : Largest owner of super prime commercial properties in KLCC. IGB REIT : Owner of Mid Valley Megamall and Gardens Mall in Mid Valley City. Pavilion REIT : Premium retail REIT managing the largest premium shopping mall in Malaysia. Sunway REIT : Retail REIT with diversification in hospitality and office assets primarily in Bandar Sunway, Selangor. It also has properties in Penang and Perak. CapitaLand Malaysia Mall Trust : Pure retail REIT with presence in Klang Valley, Penang and Kuantan. Axis REIT : A primarily industrial real estate investment trust with industrial/logistics, commercial, office and office/retail properties in Malaysia. MRCB-Quill REIT : An office-focused real estate investment trust with assets primarily in Petaling Jaya and Cyberjaya, with a small presence in Penang. The injection of Platinum Sentral gives it signifcant exposure to Kuala Lumpur. Weak consumer sentiment % y-o-y 10 9 8 7 6 5 4 Price Mkt Cap Target Price Performance (%) RM US$m RM 3 mth 12 mth Rating KLCCP Stapled 7.48 3,300 7.70 4.5 8.4 HOLD IGB REIT 1.56 1,328 1.65 2.6 15.6 HOLD Pavilion REIT 1.70 1,255 1.85 0.6 14.1 BUY Sunway REIT 1.62 1,165 1.80 3.2 1.3 BUY CapitaLand 1.55 768 1.70 7.6 11.5 BUY Axis REIT 1.71 462 1.75 10.3 (1.7) HOLD MRCB-Quill REIT 1.14 184 1.30 (0.9) (2.6) HOLD Private consumption growth (lhs) Consumer sentiments index (rhs) 130 120 110 100 90 80 70 60 Source: AllianceDBS Research ed-ck / sa- BC
Industry Focus Malaysia REIT 2QCY16 headwinds 1QCY16 earnings were mostly in-line, except for Axis REIT s which came in below our and consensus expectations. Earnings growth was mostly flattish to moderate, excluding Sunway REIT (15% y-o-y) and MRCB-Quill REIT (+84% y-o-y) which registered strong growth due to sizeable contributions from the respective acquisitions of Sunway Putra Mall and Platinum Sentral. The moderate organic growth experienced was also due to the higher base from pre-gst spending. We trimmed our FY16/FY17 forecasts for Axis REIT on expectations of low rental reversions and occupancy replacement. We maintain our stock recommendations as at our 1QCY16 review. We expect to see the following prevailing challenges in 2QCY16: 1) weak consumer spending to affect retail segment, 2) oversupply of office space, and 3) weaker hotel segment due to seasonally softer demand. That being said, we have incorporated the weak/negative reversions and poor occupancies of underperforming assets in our portfolio. As such, we believe the fundamentals are intact given that major earnings risks have been accounted for, and our estimates are conservative compared to consensus. The MIER Consumer Sentiment Index has shown some signs of recovery in 1QCY16 at 72.9 pts (+9.1 pts y-o-y). Although still below the 100-pt threshold level of confidence, we believe this is an indication that the prolonged weak domestic consumption may have bottomed out since the implementation of GST last year and we expect the consumer sentiment to gradually improve moving forward. In addition, the improvement in consumer spending was also supported by fiscal measures to raise household disposable income such as the EPF contribution rate cut (March), tax relief (March), salary increment for civil servants (July) and minimum wage hike (July). In the near term, organic rental income is expected to remain steady with flattish growth due to moderate reversions and the current weak consumer sentiment. Any substantial push in NPI growth will boil down to acquisitions and portfolio expansions (see Exhibit 1). Reversions from retail assets are resilient with most REITs expecting to record positive NPI growth. However, the hospitality and office segments continue to struggle in filling up vacancies. In order to grow further, the majority of the REITs are looking at potential acquisitions with immediate earnings accretions to boost NPI and DPU. Exhibit 1: NPI growth REIT FY14 FY15 FY16F FY17F FY18F KLCCSS 6% -1% 6% 4% 3% IGB REIT 9% 10% 0% 4% 5% SunREIT 4% 6% 14% 11% 8% PavREIT 7% 3% 20% 18% 5% CMMT 0% 8% 20% 5% 4% Axis REIT -3% 20% 4% 10% 5% MQ-REIT 0% 69% 8% 4% 4% Source: AllianceDBS Research 1QCY16 is seasonally a strong quarter that encompasses the New Year and Chinese New Year celebrations. 2HCY16 earnings will be supported by festivals such as Hari Raya in July, Deepavali in October and followed by Christmas in December. However, we foresee 2QCY16 to be challenging as it is typically a weak quarter, coupled with continued weak consumer spending. A positive surprise in 2QCY16 s earnings will be an indicator of a recovery in consumer sentiment. Retail segment Dampened consumer sentiment may have negative effects on the retail sector, in the form of lower retail spending, rental reversions and visitor traffic. In light of the prolonged weak sentiment and sluggish same store sales growth, REIT managers have begun to negotiate tenancy renewals in advance. Across the board, occupancy levels remained resilient for all the REITs under our coverage as REIT managers focused on retaining tenants rather than securing high reversions (see Exhibit 2). Exhibit 2: Blended portfolio occupancy and lease expiry 70% 60% 50% 40% 30% 20% 10% 0% 97% 28% 96% 36% 97% 97% 97% 98% 20% 30% 32% 26% FY13 FY14 FY15 FY16F FY17F FY18F Lease expiry of total NLA (%) Occupancy rate (%) Source: AllianceDBS Research 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% Page 2
Industry Focus Malaysia REIT Aside from prime shopping hotspots such as Suria KLCC, Sunway Pyramid, Mid Valley Megamall and The Gardens mall, REITs are adopting a different strategy for other malls in its portfolio. For small- to mid-sized urban malls, management is adjusting the tenants mix and re-positioning the malls target market to cater to the needs of the neighbourhood. One of the focuses is to improve the F&B tenant mix at the expense of other segments, as F&B is less vulnerable to the fluctuations of discretionary spending. Office segment The National Property Info Centre s most recent data release is for 4Q15, which showed that the composite Kuala Lumpur office rental index rose 3.2%. However, the average availability rate (or vacancy rate) had increased in 2H15 to 21.5% from 19.7% (2H14). Although occupancy levels have been struggling to trend up, the average rental rates have been increasing due to the presence of more investment-grade properties and newer buildings with better facilities. The increase was also influenced by upgraded services and facilities provided in existing buildings. Nonetheless, vacancy rate is still a worrying issue faced by the office REITs in our coverage. Out of all the REITs in our coverage, Axis REIT and MQ-REIT are office and commercial-based REITs, while KLCCSS has high exposure to the office segment at 82% of its total NLA. On the other hand, CMMT, PavREIT and IGB REIT are retail-focused REITs. Exhibit 3: Blended portfolio occupancy and lease expiry 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 95% 14% 94% 20% 92% 14% 92% 17% 93% 94% 13% 10% FY13 FY14 FY15 FY16F FY17F FY18F Lease expiry of total NLA (%) Occupancy rate (%) 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% Acquisition summary In CY15, there were a number of accretive acquisitions by REITs under our coverage, which consist of; 1) PavREIT s da:men (RM486.8m) and Intermark Mall (RM160m), 2) CMMT s Tropicana City Property (RM540m), 3) SunREIT s Sunway Putra Place (acquired at the cost of RM522m in CY11; re-opened in CY15 post refurbishment), Sunway Hotel Georgetown (RM74m) and Wisma Sunway (RM60m), and 5) MRCB-Quill REIT s Platinum Sentral (RM740m). In terms of total consideration, the amount came to RM2.6bn (see Exhibit 4). Exhibit 4: Estimated yield REIT Asset Estimated acquisition yield PavREIT Da:men USJ 6.18% PavREIT Intermark mall 6.10% CMMT Tropicana City Property 5.30% SunREIT Sunway Putra Place 6.00% SunREIT Sunway Hotel Georgetown 5.14% SunREIT Wisma Sunway 6.64% MQ-REIT Platinum Sentral 6.60% Source: AllianceDBS Research There have been no substantial acquisitions so far in CY16. Year-to-date, Axis REIT has agreed to acquire the following properties: 1) Beyonics i-park Campus for RM61m, 2) a logistics warehouse in SiLC for RM41m, and 3) a warehouse facility in Pasir Gudang for RM33m. Furthermore, Sunway REIT recently announced its planned acquisition of a vacant land next to Sunway Carnival Mall for RM17m that is intended to facilitate future expansion of the mall. Nonetheless, we expect the conditions to improve in 2HCY16, with more proposed acquisitions in the pipeline involving MRCB-Quill REIT (Menara Shell), PavREIT (Pavilion Extension and Fahrenheit88 Mall) and Axis REIT (six assets with an indicative value of RM242m). Moreover, in the mid to long term, we foresee injection opportunities for SunREIT and IGB REIT, as their sponsors are developing new retail malls. Source: AllianceDBS Research Page 3
Industry Focus Malaysia REIT TP revision on lower risk-free rate assumption Several factors have led us to lower our house s assumption on risk-free rate which is based on the benchmark 10-year MGS yield. Firstly, central banks of major economies (US, Japan and Europe) have continued to adopt loose monetary stance despite keeping interest rate near zero level for close to a decade post-global Financial Crisis. This was mainly due to tame inflationary pressure and weak economic growth trajectory. On 15 June 2016, US Fed maintained its interest rates at the FOMC Meeting, and indicated that it still plans to raise rates twice in CY16, though it telegraphed slower economic growth would slow the pace of monetary policy tightening in future years. Note that expectation of the number of rate hikes in CY16 has reduced to two from four earlier this year. Secondly, investors have generally turned risk-off amid weak earnings growth and macro uncertainty. In particular, recent Brexit event has triggered massive sell-off in risk assets in favour of safe haven assets. Exhibit 5: Portfolio yield vs 10yr MGS spread % 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% Weighted Portfolio Yield (lhs) 10YR MGS Yield (lhs) Portfolio vs MGS Spread (rhs) Source: Bloomberg, AllianceDBS Research % 2.5% 2.0% 1.5% 1.0% 0.5% The TPs of REITs under our coverage have been raised by 6-15%, following the change in our risk-free rate assumption (see Exhibit 6). We maintain our stock recommendations. Taking these factors into account, AllianceDBS risk free-rate assumption has been lowered from 4.3% to 4.0%. Note that the 10-year MGS yield has retraced from a high of 4.45% in August 2015 to the present level of 3.8%-3.9% since the last US Fed rate hike in Dec 2015. Exhibit 6: TP Revision AllianceDBS forecasts Call Last Price Mkt Cap (RM m) TP Upside Revised TP Change Revised Upside CY2016 CY2017 KLCC Stapled Securities HOLD 7.48 13,501.0 6.70-10.4% 7.70 15% 2.9% 4.8% 5.0% IGB REIT HOLD 1.56 5,426.0 1.45-7.1% 1.65 14% 5.8% 5.2% 5.5% Pavilion REIT BUY 1.70 5,134.0 1.75 2.9% 1.85 6% 8.8% 5.2% 5.7% Sunway REIT BUY 1.62 4,764.0 1.70 4.9% 1.80 6% 11.1% 6.0% 6.6% CapitaMalls Malaysia Trust BUY 1.55 3,042.0 1.55 0.0% 1.70 10% 9.7% 6.2% 6.7% Axis REIT HOLD 1.71 1,890.0 1.60-6.4% 1.75 9% 2.3% 4.9% 5.3% MRCB-Quill REIT HOLD 1.14 754.0 1.20 5.3% 1.30 8% 14.0% 7.5% 7.7% Yield ADBS total / weighted avg 34,511.0 11% 6% 5.3% 5.6% less KLCCSS 21,010.0 9% 8% 5.6% 6.0% Sources: AllianceDBS, Bloomberg Finance L.P *As at 27 th Jun 2016 Page 4
Industry Focus Malaysia REIT Exhibit 7: Peer comparison (as at 27 June2016) AllianceDBS forecasts Call TP Price Mkt Cap (RM m) DPU Growth (YoY) DPU (sen) Price/NAV Dividend Yield EPS (sen) CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 KLCC Stapled Securities HOLD 7.70 7.48 13,501.0 4% 3% 35.9 37.2 1.07x 1.07x 4.8% 5.0% 40.8 42.0 IGB REIT HOLD 1.65 1.56 5,426.0 0% 5% 8.2 8.6 1.47x 1.46x 5.2% 5.5% 7.5 7.8 Pavilion REIT BUY 1.85 1.70 5,134.0 8% 9% 8.9 9.7 1.34x 1.33x 5.2% 5.7% 8.5 9.3 Sunway REIT BUY 1.80 1.62 4,764.0 8% 9% 9.8 10.7 1.18x 1.19x 6.0% 6.6% 9.8 11.1 CapitaMalls Malaysia Trust BUY 1.70 1.55 3,042.0 11% 9% 9.6 10.4 1.17x 1.17x 6.2% 6.7% 8.7 9.3 Axis REIT HOLD 1.75 1.71 1,890.0 0% 8% 8.4 9.1 1.39x 1.39x 4.9% 5.3% 9.8 10.7 MRCB-Quill REIT HOLD 1.30 1.14 754.0 1% 3% 8.6 8.8 0.84x 0.84x 7.5% 7.7% 8.6 8.8 ADBS total / weighted avg 34,511.0 5% 6% 19.5 20.4 1.21x 1.21x 5.3% 5.6% 21.2 22.2 less KLCCSS 21,010.0 5% 8% 9.0 9.7 1.30x 1.30x 5.6% 6.0% 8.7 9.4 Sources: AllianceDBS, Bloomberg Finance L.P Page 5
Malaysia Company Guide KLCCP Stapled Group Version 3 Bloomberg: KLCCSS MK Reuters: KCCP.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Jun 2016 HOLD Last Traded Price: RM7.48 (KLCI : 1,629.52) Price Target : RM7.70 (3% upside) (Prev RM6.70) Potential Catalyst: Yield-accretive asset injections Where we differ: In line with consensus Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com Price Relative 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 RM Relative Index 3.5 88 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 KLCCP Stapled Group (LHS) Relative KLCI INDEX (RHS) Forecasts and Valuation FY Dec (RM RMm) 2015A 2016F 2017F 2018F Revenue 1,340 1,429 1,487 1,531 EBITDA 1,048 1,112 1,151 1,185 Pre-tax Profit 1,392 989 1,025 1,055 Net Profit 1,006 736 759 775 Net Pft (Pre Ex.) 679 736 759 774 Net Pft Gth (Pre-ex) (%) (1.6) 8.5 3.0 2.0 EPS (sen) 55.7 40.8 42.0 42.9 EPS Pre Ex. (sen) 37.6 40.8 42.0 42.9 EPS Gth Pre Ex (%) (2) 9 3 2 Diluted EPS (sen) 37.6 40.8 42.0 42.9 Net DPS (sen) 34.6 35.9 37.2 38.5 BV Per Share (sen) 695 697 700 702 PE (X) 13.4 18.3 17.8 17.4 PE Pre Ex. (X) 19.9 18.3 17.8 17.5 P/Cash Flow (X) 14.5 14.4 14.0 13.6 EV/EBITDA (X) 23.6 22.3 21.6 21.0 Net Div Yield (%) 4.6 4.8 5.0 5.1 P/Book Value (X) 1.1 1.1 1.1 1.1 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 ROAE (%) 21.8 15.4 15.9 16.2 Earnings Rev (%): 0 0 0 Consensus EPS (sen): 41.0 42.2 43.9 Other Broker Recs: B: 3 S: 0 H: 9 Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P 208 188 168 148 128 108 On safe ground TP raised on lower risk-free rate assumption. Given the prevalent risk-off environment particularly following the Brexit and expectation of continued easy monetary policies, our house risk-free rate assumption (based on 10-year MGS yield) has been lowered to 4.0% (from 4.3%). Best in class assets and tenants. About half of KLCCSS s operating profit is derived from office buildings, comprising four assets including Malaysia s iconic PETRONAS Twin Towers. They boast long lease terms of up to 15 years, triple-net-lease structures, and solid tenant profiles that include PETRONAS and ExxonMobil. Fixed rental escalations (ranging from 9-14% every three years) built into the tenancies underpin steady revenue growth for the stapled security. Significant growth only from 2019 onwards. Asset enhancement works for Kompleks Dayabumi is on track and it is presently in phase 2 of the extension plan of the 1m sq ft NLA tower comprising 0.5m-sq-ft NLA of office space, with the rest being retail and hospitality space. The vacant Lot D1 (1.3m-sq-ft GLA) is awaiting a suitable anchor tenant before development commences. KLCCSS also has right of first refusal to parent KLCC Holdings planned developments around the KLCC area. Given the low implied yields at current prices, the potential acquisitions will be value-accretive to the REIT. Valuation: Our DDM-derived TP is revised to RM7.70, following the change in our risk-free rate assumption, with 8.5% cost of equity and 1% terminal growth. We maintain our HOLD call for KLCCSS given the lack of re-rating catalysts. Key Risks to Our View: Weak sentiment could hurt retail and hospitality sector. The soft consumer spending outlook and the GST implementation could have an impact on KLCCSS retail and hospitality assets. The former may be hurt by poorer rental reversions, and the latter by fewer visitors and bookings. At A Glance Issued Capital (m shrs) 1,805 Mkt. Cap (RMm/US$m) 13,504 / 3,300 Major Shareholders (%) Petroliam Nasional Bhd 75.5 Free Float (%) 20 3m Avg. Daily Val (US$m) 0.94 ICB Industry : Real Estate / Real Estate ed: CK / sa: BC
KLCCP Stapled Group CRITICAL DATA POINTS TO WATCH Earnings Drivers: Triple net leases for office assets. KLCCSS has four main prime office buildings: the PETRONAS Twin Towers, Menara Petronas 3, Menara ExxonMobil, and Menara Dayabumi. All are on triplenet-lease structures, i.e. insurance, maintenance, quit rent and assessment will be borne by the tenants instead of KLCCSS. Hence, NPI margins are high at about 90% with minimal volatility from cost pressures. Rental rates are locked long term as well, with three-year built-in step-ups. Together, these office assets generate c.45% of topline and over 50% of PBT. Of the four, the Twin Towers, Petronas 3 and Menara ExxonMobil are put in the REIT component of the stapled security so that their earnings are eligible for tax benefits. The effective tax rate for KLCCSS is <15%, and is expected to remain at that level going forward. Retail exposure. KLCCSS owns 60% of the c.1m sq ft NLA Suria KLCC, which sees over 45m footfall annually from locals and tourists. The rental rates, averaging c.rm29psf/mth, reflect its super-prime location. Most of the leases at this property are for three years with about a third of NLA expiring annually. Reversions have historically been strong at double-digit rates, which we expect to be sustained given its prime location. The stapled security also has another 132k sq ft NLA of retail space in the Petronas 3 building. Together, the retail assets contribute c.35% to topline and pretax. 5,197 4,455 3,712 2,970 2,227 1,485 742 0 36.4 29.1 21.8 14.6 7.3 0.0 470 376 282 188 94 Office NLA (k sq ft) 5,146 5,146 5,146 5,146 5,146 Suria KLCC avg rental psf/m (RM) 35.7 33.6 31.6 29.7 27.6 Mandarin Oriental RevPAR (RM) 448 461 406 401 292 Key development works. KLCCSS is currently in the process of demolishing the Menara Dayabumi / CityPoint Podium asset. A 65-storey office asset, a 6-storey retail area (c.0.5m sq ft NLA), and a 5-star, 500-room hotel to be managed by the Shangri-La group will be built. Completion is targeted for 2019. Also, the vacant Lot D1 (which can be developed into 1.4m sq ft of gross floor area) is seeking an anchor tenant before development works kick off. ROFRs to more prime assets. Holding company KLCC Holdings has separate joint ventures (JVs) with Qatari Diar Asia Pacific and Sapura Resources, and are developing two major assets in the KLCC area (Lot 185 and Lot 91 respectively). KLCCSS has the right of first refusal (ROFR) to both assets, which are expected to be office-centric assets with completion dates in 2019. Additionally, the 4-star, 571-room Traders Hotel within the KLCC area is also a potential candidate for injection. Modest hospitality exposure. KLCCSS also owns the 5-star Mandarin Oriental hotel located within the KLCC area. The 643- room hotel also has meeting, incentive, conference & exhibition (MICE) facilities to cater to its corporate clientele. However, PBT contribution is small at 2-3%. 0 Quarterly operating profit (RM m) and margins (%) 265.0 80% 255.0 79% 78% 245.0 77% 235.0 76% 75% 225.0 74% 215.0 73% 72% 205.0 71% 195.0 70% 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Operating profit Operating profit margin Page 7
KLCCP Stapled Group Balance Sheet: Solid balance sheet. KLCCSS has a net gearing ratio of c.15%, which is relative low compared to 25-35% for other M-REITs. It also has a large cash pile of c.rm1bn. Debt maturity is weighed towards the long term as only c.rm1bn will mature within the next four years. More than 85% of its borrowings (RM2.2bn) are from the RM3bn sukuk facility, and 86% of borrowings are on fixed rates. Share Price Drivers: Asset growth opportunities. KLCCSS management has claimed it is selective on acquisitions, focusing only on super-prime properties. While this could limit near-term non-organic growth options, the completion and injection of key assets in 2019 and beyond implies that growth will only pick up significantly in the medium term. Key Risks: Weak sentiment could hurt retail and hospitality sector. The soft consumer spending outlook and the GST implementation could have an impact on KLCCSS s retail and hospitality assets. The former may be hurt by poorer rental reversions, and the latter by fewer visitors and bookings. Company Background KLCC Stapled Security is a stapled group comprising KLCC REIT (which owns the Petronas Twin Towers, Menara ExxonMobil and Petronas Tower 3), and KLCC Property, (which holds Kompleks Dayabumi, Mandarin Oriental and Suria KLCC). Leverage & Asset Turnover (x) 0.25 0.20 0.15 0.10 0.05 0.00 Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMm 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Capital Expenditure (-) 20.0% 15.0% 10.0% 5.0% ROE (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0% (x) 23.4 Forward PE Band (x) 21.4 19.4 17.4 15.4 +2sd: 19.6x +1sd: 18.6x Avg: 17.5x -1sd: 16.5x -2sd: 15.5x 13.4 11.4 Jun-12 Jun-13 Jun-14 Jun-15 (x) 1.5 PB Band (x) 1.4 1.3 1.2 1.1 1.0 0.9 0.8 +2sd: 1.17x +1sd: 1.1x Avg: 1.03x -1sd: 0.96x -2sd: 0.89x 0.7 0.6 Jun-12 Jun-13 Jun-14 Jun-15 Page 8
KLCCP Stapled Group Key Assumptions FY Dec Office NLA (k sq ft) 5,146 5,146 5,146 5,146 5,146 Suria KLCC avg rental psf/m 27.7 29.7 31.6 33.6 35.7 Mandarin Oriental RevPAR 406 292 401 448 461 Segmental Breakdown FY Dec Revenues (RMm) Office 596 557 592 600 600 Retail 472 496 533 563 595 Hotel 183 184 196 212 220 Managed Services 103 102 109 112 115 Total 1,354 1,340 1,429 1,487 1,531 Operating (RMm) Office 529 526 532 540 540 Retail 388 402 430 455 481 Hotel 35.9 18.2 39.2 42.4 44.1 Managed Services 72.6 74.2 63.1 65.0 67.0 Total 1,012 1,004 1,065 1,102 1,133 Operating Margins (%) Office 88.8 94.4 90.0 90.1 90.1 Retail 82.1 80.9 80.7 80.8 80.9 Hotel 19.6 9.9 20.0 20.0 20.0 Managed Services 70.8 72.4 58.0 58.0 58.0 Total 74.8 74.9 74.5 74.2 74.0 Income Statement (RMm) FY Dec Revenue 1,354 1,340 1,429 1,487 1,531 Cost of Goods Sold (342) (336) (364) (384) (398) Gross Profit 1,012 1,004 1,065 1,102 1,133 Other Opng (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 1,012 1,004 1,065 1,102 1,133 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (6.7) 13.7 13.4 13.4 13.4 Net Interest (Exp)/Inc (111) (78.3) (89.3) (90.5) (91.7) Exceptional Gain/(Loss) 249 453 0.0 0.0 0.0 Pre-tax Profit 1,143 1,392 989 1,025 1,055 Tax (121) (115) (132) (139) (145) Minority Interest (221) (272) (121) (128) (136) Preference Dividend 0.0 0.0 0.0 0.0 1.00 Net Profit 800 1,006 736 759 775 Net Profit before Except. 689 679 736 759 774 EBITDA 1,035 1,048 1,112 1,151 1,185 Growth Revenue Gth (%) 5.8 (1.0) 6.6 4.0 3.0 EBITDA Gth (%) 3.9 1.3 6.0 3.6 2.9 Opg Profit Gth (%) 6.4 (0.8) 6.0 3.6 2.8 Net Profit Gth (Pre-ex) (%) 10.3 (1.6) 8.5 3.0 2.0 Margins & Ratio Gross Margins (%) 74.8 74.9 74.5 74.2 74.0 Opg Profit Margin (%) 74.8 74.9 74.5 74.2 74.0 Net Profit Margin (%) 59.1 75.0 51.5 51.0 50.6 ROAE (%) 18.4 21.8 15.4 15.9 16.2 ROA (%) 4.8 5.9 4.2 4.3 4.4 ROCE (%) 5.6 5.5 5.3 5.5 5.6 Div Payout Ratio (%) 95.0 100.9 90.0 90.0 90.0 Net Interest Cover (x) 9.1 12.8 11.9 12.2 12.4 Lower due to refurbishment works Revaluation gain of RM578.8m across its investment properties Page 9
KLCCP Stapled Group Quarterly / Interim Income Statement (RMm) FY Dec 1Q2015 2Q2015 2015 3Q2015 4Q2015 1Q2016 Revenue 327 329 337 347 335 Cost of Goods Sold (71.4) (73.1) (107) (93.8) (92.8) Gross Profit 256 256 230 253 242 Other Oper. (Exp)/Inc (7.7) (7.4) (7.4) (8.1) (7.6) Operating Profit 248 249 255 425 252 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 2.11 3.58 3.02 4.97 3.01 Net Interest (Exp)/Inc (19.0) (19.5) (20.2) (19.7) (19.2) Exceptional Gain/(Loss) 0.0 0.0 (32.2) 439 0.0 Pre-tax Profit 231 233 205 850 236 Tax (26.7) (26.6) (29.1) (32.8) (26.7) Minority Interest (25.7) (26.2) (26.3) (193) (26.7) Net Profit 179 180 150 623 183 Net profit bef Except. 179 180 182 184 183 EBITDA 258 259 265 438 263 Growth Revenue Gth (%) (5.8) 0.6 2.5 3.0 (3.6) EBITDA Gth (%) (32.4) 0.7 2.1 65.4 (40.0) Opg Profit Gth (%) (36.4) 0.3 2.4 67.0 (40.7) Net Profit Gth (Pre-ex) (%) (2.6) 0.8 1.2 1.2 (0.8) Margins Gross Margins (%) 78.2 77.8 68.1 73.0 72.3 Opg Profit Margins (%) 75.8 75.5 75.5 122.5 75.4 Net Profit Margins (%) 54.6 54.7 44.4 179.6 54.6 Balance Sheet (RMm) FY Dec Net Fixed Assets 610 639 672 706 741 Invts in Associates & JVs 261 265 279 292 305 Other LT Assets 14,717 15,457 15,507 15,557 15,607 Cash & ST Invts 1,127 1,111 1,074 1,035 994 Inventory 2.00 1.84 1.96 2.04 2.10 Debtors 87.2 62.9 67.1 69.8 71.9 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 16,804 17,537 17,601 17,662 17,721 ST Debt 357 28.5 28.5 28.5 28.5 Creditor 263 278 302 318 330 Other Current Liab 23.8 24.6 24.6 24.6 24.6 LT Debt 2,155 2,532 2,532 2,532 2,532 Other LT Liabilities 158 162 162 162 162 Shareholder s Equity 4,462 4,775 4,777 4,776 4,775 Minority Interests 9,386 9,736 9,774 9,819 9,869 Total Cap. & Liab. 16,804 17,537 17,601 17,662 17,721 Non-Cash Wkg. Capital (197) (238) (258) (271) (281) Net Cash/(Debt) (1,384) (1,450) (1,486) (1,526) (1,567) Debtors Turn (avg days) 18.7 20.4 16.6 16.8 16.9 Creditors Turn (avg days) 328.7 323.3 320.1 324.8 329.2 Inventory Turn (avg days) 2.1 2.3 2.1 2.1 2.1 Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 1.9 3.5 3.2 3.0 2.8 Quick Ratio (x) 1.9 3.5 3.2 3.0 2.8 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.3 Capex to Debt (%) 2.7 6.0 4.6 4.7 4.8 Z-Score (X) 3.4 3.4 3.4 3.4 3.4 Page 10
KLCCP Stapled Group Cash Flow Statement (RMm) FY Dec Pre-Tax Profit 1,280 1,518 989 1,025 1,055 Dep. & Amort. 29.6 30.5 33.5 35.6 37.9 Tax Paid (115) (108) (132) (139) (145) Assoc. & JV Inc/(loss) 6.73 (13.7) (13.4) (13.4) (13.4) Chg in Wkg.Cap. (164) (29.1) 19.3 13.6 9.49 Other Operating CF (194) (466) 40.1 41.6 52.2 Net Operating CF 843 932 936 964 995 Capital Exp.(net) (68.2) (153) (117) (120) (123) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 6.52 9.12 0.0 0.0 0.0 Net Investing CF (61.7) (144) (117) (120) (123) Div Paid (720) (738) (767) (794) (822) Chg in Gross Debt 163 47.2 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (176) (115) (89.3) (90.5) (91.7) Net Financing CF (734) (806) (857) (884) (914) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 47.6 (17.5) (36.7) (39.5) (40.8) Opg CFPS (sen) 55.8 53.3 50.8 52.7 54.6 Free CFPS (sen) 42.9 43.2 45.4 46.8 48.3 Target Price & Ratings History 7.86 7.66 7.46 7.26 7.06 6.86 RM 2 1 3 4 5 S.No. Date Closing Target Rating Price Price 1: 10 Aug 15 7.04 6.50 HOLD 2: 11 Aug 15 7.04 6.85 HOLD 3: 14 Sep 15 7.08 6.50 HOLD 4: 12 Nov 15 7.05 6.55 HOLD 5: 09 May 16 7.25 6.70 HOLD 6.66 6.46 Jun-15 Oct-15 Feb-16 Jun-16 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Research Page 11
Malaysia Company Guide IGB REIT Version 4 Bloomberg: IGBREIT MK Reuters: IGRE.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Jun 2016 HOLD Last Traded Price: RM1.56 (KLCI : 1,629.52) Price Target : RM1.65 (6% upside) (Prev RM1.45) Potential Catalyst: Stronger-than-expected rental reversions Where we differ: Lower NPI margin assumptions than consensus Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com Price Relative 1. 8 1. 7 1. 6 1. 5 1. 4 1. 3 1. 2 1. 1 R M 1. 0 S e p - 1 2 S e p - 1 3 S e p - 1 4 S e p - 1 5 I G B R E I T ( L H S ) R e la t iv e K L C I IN D E X ( R H S ) R e l a t i v e I n d e x Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F Gross Revenue 489 501 522 546 Net Property Inc 343 344 358 375 Total Return 254 264 278 288 Distribution Inc 284 285 299 309 EPU (sen) 7.32 7.59 7.99 8.27 EPU Gth (%) (21) 4 5 3 DPU (sen) 8.17 8.18 8.59 8.89 DPU Gth (%) 5 0 5 3 NAV per shr (sen) 106 106 107 108 PE (X) 21.3 20.6 19.5 18.9 Distribution Yield (%) 5.2 5.2 5.5 5.7 P/NAV (x) 1.5 1.5 1.5 1.4 Aggregate Leverage (%) 23.9 23.7 23.6 23.5 ROAE (%) 6.9 7.2 7.5 7.7 Distn. Inc Chng (%): 0 0 0 Consensus DPU (sen sen): 8.50 8.90 9.50 Other Broker Recs: B: 5 S: 0 H: 6 Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P 2 1 1 1 9 1 1 7 1 1 5 1 1 3 1 1 1 1 9 1 7 1 Moving at a steady pace TP raised on lower risk-free rate assumption. Given the prevalent risk-off environment particularly following the Brexit and expectation of continued easy monetary policies, our house risk-free rate assumption (based on 10-year MGS yield) has been lowered to 4.0% (from 4.3%). Rental-reversion outlook intact. Its average rental rates of RM10-12psf/mth are still lower than prime areas in the KL city centre that can exceed RM20psf/mth. We expect continued positive reversions at Mid Valley Megamall (MVM) and The Gardens (TG), despite the current headwinds from dampened consumer sentiment. Earnings growth will likely be steady, as NLA expiries are spaced relatively evenly at 30-36% per year. Potential catalyst in the long term. Parent IGB Corp is developing the Mid Valley Southkey mall in Johor, with c.1.5m-sq-ft NLA in the first phase expected to complete in 2018. Upon maturity, this may be an injection opportunity for the REIT as it has the right of first refusal over this asset. The mall s NLA may be as large as 1.5m sq ft. With its gearing of 24%, we estimate IGBREIT s present debt headroom to be c.rm1.4bn. However, the mall may be allowed to mature first before injection, thus pushing the acquisition timeframe further beyond 2018. Valuation: Our DDM-derived TP is revised to RM1.65, following the change in our risk-free rate assumption, with 7.4% cost of equity and 1% terminal growth. We maintain our HOLD recommendations as there is limited earnings upside in the near term. Key Risks to Our View: Lower consumer spending may bite. Among its peers, IGBREIT has the highest direct exposure to retail spending as >10% of total revenue is derived from turnover rent. A severe decline in tenant sales at MVM and TG will thus likely affect IGBREIT s earnings and DPU. At A Glance Issued Capital (m shrs) 3,483 Mkt. Cap (RMm/US$m) 5,434 / 1,328 Major Shareholders (%) IGB Corporation Bhd 51.9 Employee Provident Fund 6.9 Kumpulan Wang Persaraan 6.0 Free Float (%) 35.2 3m Avg. Daily Val (US$m) 0.46 ICB Industry : Real Estate / Real Estate Investment Trusts ed: CK/ sa: BC
IGB REIT CRITICAL DATA POINTS TO WATCH Earnings Drivers: Reversion rates at conjoined assets. IGBREIT s key assets are the 1.8m-sq-ft NLA Mid Valley Megamall (MVM) and the connecting 828k-sq-ft NLA The Gardens (TG) mall. In past years, both have managed to log double-digit reversion rates of up to 15% on the typical 3-year lease agreements with their tenants, working out to c.5% annual increments. Consequently, average rental rates have risen to RM11-12.5psf/mth from RM9-10.5psf/mth in 2012 when it was listed. We foresee this trend to persist going forward, due to the 1) prime location of the malls, and 2) lower rentals relative to KL city centre s >RM20psf/mth. Keeping up high occupancy. The occupancy rates at IGBREIT s malls have consistently been high, at 98-99% for TG and 99%- full at MVM in the past few years. In FY16/17, expiring leases in NLA terms for MVM are 24%/39% and 45%33% for TG. Thus, at the portfolio level, expiries are spread relatively evenly at 30%/36% in FY16/17. Given the prime locations and strong demand for such retail space, we expect occupancy levels to be sustained above 98%. Management has also guided that expiring tenancies are negotiated up to one year in advance, minimising vacancy risk in FY16. Net Property Income and Margins (%) R M m 4 0 0 7 6.3 % 3 5 0 3 0 0 7 4.3 % 2 5 0 7 2.3 % 2 0 0 7 0.3 % 1 5 0 6 8.3 % 1 0 0 5 0 6 6.3 % 0 6 4.3 % 2 0 1 4 A 2 0 1 5 A 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F N e t P ro p e rt y In c o m e N e t P r o p e rt y In c o m e M a rg in % 9 4 8 9 8 4 7 9 7 4 6 9 1.0 0.9 0.8 Net Property Income and Margins (%) 3 4 4 4 4 5 5 1 1 1 1 1 1 1 0 0 0 0 0 0 0 2 2 2 2 2 2 2 Q Q Q Q Q Q Q 4 1 2 3 4 1 2 7 4 % 7 2 % 7 0 % 6 8 % 6 6 % 6 4 % 6 2 % 6 0 % 5 8 % 5 5 6 1 1 1 0 0 0 2 2 2 Q Q Q 3 4 1 N e t P ro p e r ty In c o m e N e t P r o p e rty In c o m e M a rg in % (x ) Distribution Paid / Net Operating CF Retail sales from tenants. ts. Relative to other MREITs, IGBREIT s lease agreements have a high proportion of turnover rent, which makes up 12-15% of its topline. Due to the prime locations of its malls, we expect IGBREIT s aggregate tenant retail sales to remain positive moving forward. 0.7 0.6 0.5 0.4 0.3 2 0 1 4 A 2 0 1 5 A 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F Asset-enhancement enhancement initiatives. Besides rental reversions, the REIT s earnings may also be boosted by enhancement works on its assets. These include increasing NLA, improving facilities and amenities, refreshing external appearances, and restructuring rentable space and the tenant mix. In 2015, an additional 40ksq-ft NLA was added at MVM after some space reconfiguration on its 3rd floor. While no plans have been disclosed, further yield-accretive enhancement activities by management may help boost rental income going forward. Inorganic growth not so soon. IGBREIT has been granted the right of first refusal (ROFR) to the Mid Valley Southkey Mall in Iskandar, Johor Bahru by its sponsor and major unitholder, IGB Corp. The mall, part of Phase 1 of the larger Southkey mixed development on a 330-acre plot, is slated to complete in 2018. The Southkey development is a 70:30 joint venture between IGB Corp and Selia Pantai Sdn Bhd. The mall s NLA may be as large as 1.5m sq ft. With its gearing of 24%, we estimate IGBREIT s present debt headroom to be c.rm1.4bn. However, the mall may be allowed to mature first before injection, thus pushing the acquisition timeframe further beyond 2018. Interest Cover (x) (x ) 9.0 0 8.0 0 7.0 0 6.0 0 5.0 0 4.0 0 3.0 0 2.0 0 1.0 0 0.0 0 2 0 1 4 A 2 0 1 5 A 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F Page 13
IGB REIT Balance Sheet: Expect no changes. Almost all (>98%) of IGBREIT s debt comes from a fixed-rate syndicated financing facility which only expires at end-2017. As there is no apparent reason to increase its debt, IGBREIT s gearing of 24% and its financing costs are likely to be flat in the near term. Share Price Drivers: Forward yield spread. A REIT s attractiveness depends on its distribution yield relative to other fixed-income assets. A common benchmark is the REIT s yield spread over the indicative 10-year Malaysian Government Security yield, which is currently near the c.4% level. 2 4.0 % 2 2.0 % 2 0.0 % 1 8.0 % 1 6.0 % 1 4.0 % 1 2.0 % 1 0.0 % 8.0 % 7.0 % Aggregate Leverage (%) 2 0 1 4 A 2 0 1 5 A 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F ROE (%) Key Risks: Weak sentiment could dampen retail spending. The weak Malaysian consumer sentiment has generally dampened retail spending, with Retail Group Malaysia reporting a 4% contraction in retail spending in 1Q16, compared to a 5% growth in 1Q15. The fall was attributed to higher pre-gst sales a year ago, as well as weak Chinese New Year sales in February 2016. Lower tenant sales may hurt tenants capacity to stomach higher rental reversions. As IGBREIT s tenancy agreements include a higher turnover rent portion than other mall peers, it also has more direct exposure to this risk. Lower-than than-expected payout ratio. We note that IGBREIT has only committed to a 100% payout till end-2015, and will meet the 90% minimum thereafter. Our forecasts assume a 95% payout from FY16 onwards. A lower distribution poses downside risks to our forecasts. Company Background IGBREIT is a real estate investment trust that owns the Mid Valley Megamall and The Gardens mall in Kuala Lumpur, which span 2.6m sq ft of NLA and are surrounded by office towers and hotels owned by sponsor IGB Corp Bhd. 6.0 % 5.0 % 4.0 % 3.0 % 2.0 % 1.0 % 0.0 % 2 0 1 4 A 2 0 1 5 A 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F Distribution Yield (%) ( % ) 9.0 +2sd: 8.9% 8.0 7.0 +1sd: 6.7% 6.0 5.0 Avg: 4.5% 4.0 3.0-1sd: 2.4% 2.0 1.0 0.0-2sd: 0.2% 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 1.7 PB Band (x) (x) 1.6 1.5 +2sd: 1.44x 1.4 +1sd: 1.35x 1.3 Avg: 1.25x 1.2-1sd: 1.16x 1.1-2sd: 1.06x 1.0 0.9 D e c - 1 2 D e c - 1 3 D e c - 1 4 D e c - 1 5 Page 14
IGB REIT Key Assumptions FY Dec Gross Rental Rate MVM (RM) 12.0 12.7 13.2 13.8 14.5 Gross Rental Rate GM (RM) 10.2 10.3 10.7 11.3 11.8 % of total NLA expiring 36.2 26.6 30.0 36.2 31.5 Income Statement (RMm) FY Dec Gross revenue 462 489 501 522 546 Property expenses (149) (146) (157) (164) (171) Net Property Income 313 343 344 358 375 Other Operating expenses 0.0 0.0 0.0 0.0 0.0 Other Non Opg (Exp)/Inc (31.7) (33.3) (33.6) (34.4) (35.4) Net Interest (Exp)/Inc (48.3) (55.5) (46.5) (45.8) (52.2) Exceptional Gain/(Loss) 85.0 0.0 0.0 0.0 0.0 Net Income 318 254 264 278 288 Tax 0.0 0.0 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 318 254 264 278 288 Total Return 233 254 264 278 288 Non-tax deductible Items (48.8) 37.0 35.5 36.7 37.9 Net Inc available for Dist. 269 284 285 299 309 Growth & Ratio Revenue Gth (%) 7.2 5.9 2.4 4.3 4.5 N Property Inc Gth (%) 9.4 9.6 0.4 4.1 4.8 Net Inc Gth (%) 1.8 (20.0) 3.9 5.3 3.5 Dist. Payout Ratio (%) 100.0 100.0 95.0 95.0 95.0 Net Prop Inc Margins (%) 67.7 70.1 68.7 68.6 68.7 Net Income Margins (%) 68.8 51.9 52.7 53.2 52.7 Dist to revenue (%) 58.2 58.0 56.8 57.2 56.6 Managers & Trustee s fees 0.0 0.0 0.0 0.0 0.0 ROAE (%) 8.8 6.9 7.2 7.5 7.7 ROA (%) 6.2 4.9 5.1 5.3 5.5 ROCE (%) 6.4 6.9 6.9 7.2 7.5 Int. Cover (x) 6.5 6.2 7.4 7.8 7.2 Page 15
IGB REIT Quarterly / Interim Income Statement (RMm) FY Dec 1Q2015 2Q2015 2015 3Q2015 4Q2015 1Q2016 Gross revenue 125 121 121 121 131 Property expenses (35.4) (35.0) (35.8) (40.2) (37.6) Net Property Income 90.1 86.4 85.2 81.2 93.6 Other Operating expenses 0.0 0.0 0.0 0.0 0.0 Other Non Opg (Exp)/Inc (8.4) (8.5) (8.2) (8.1) (8.7) Net Interest (Exp)/Inc (11.7) (12.1) (11.8) (20.0) (12.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 69.9 65.8 65.1 53.1 72.8 Tax 0.0 0.0 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 69.9 65.8 65.1 53.1 72.8 Total Return 0.0 0.0 0.0 0.0 0.0 Non-tax deductible Items 9.69 9.62 9.59 8.09 9.36 Net Inc available for Dist. 79.6 75.5 74.7 61.2 82.2 Growth & Ratio Revenue Gth (%) 5 (3) 0 0 8 N Property Inc Gth (%) 18 (4) (1) (5) 15 Net Inc Gth (%) 24 (6) (1) (18) 37 Net Prop Inc Margin (%) 71.8 71.1 70.4 66.9 71.4 Dist. Payout Ratio (%) 0.0 99.7 0.0 95.0 0.0 Balance Sheet (RMm) FY Dec Investment Properties 4,890 4,890 4,899 4,908 4,916 Other LT Assets 11.9 11.7 11.6 11.0 10.1 Cash & ST Invts 232 247 269 288 305 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 23.0 21.6 21.6 21.6 21.6 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 5,157 5,170 5,201 5,228 5,253 ST Debt 27.3 36.8 36.8 36.8 36.8 Creditor 215 209 209 209 209 Other Current Liab 0.0 0.0 0.0 0.0 0.0 LT Debt 1,196 1,196 1,196 1,196 1,196 Other LT Liabilities 54.6 62.8 62.8 62.8 62.8 Unit holders funds 3,663 3,666 3,697 3,724 3,749 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 5,157 5,170 5,201 5,228 5,253 Non-Cash Wkg. Capital (192) (187) (187) (187) (187) Net Cash/(Debt) (992) (986) (964) (945) (928) Ratio Current Ratio (x) 1.1 1.1 1.2 1.3 1.3 Quick Ratio (x) 1.1 1.1 1.2 1.3 1.3 Aggregate Leverage (%) 23.7 23.9 23.7 23.6 23.5 Z-Score (X) 2.4 2.4 2.4 2.4 2.4 Page 16
IGB REIT Cash Flow Statement (RMm) FY Dec Pre-Tax Income 318 254 264 278 288 Dep. & Amort. 2.10 2.47 2.81 3.14 3.48 Tax Paid 0.0 0.0 0.0 0.0 0.0 Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 6.23 6.48 (0.2) 0.0 0.0 Other Operating CF (3.4) 32.4 32.7 33.5 34.4 Net Operating CF 323 295 299 315 326 Net Invt in Properties (2.8) (2.5) (11.3) (11.3) (11.3) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 6.21 7.13 7.13 7.13 7.13 Net Investing CF 3.44 4.60 (4.2) (4.2) (4.2) Distribution Paid (258) (290) (271) (292) (304) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 New units issued 0.0 0.0 0.0 0.0 0.0 Other Financing CF (54.3) (54.4) 0.0 0.0 0.0 Net Financing CF (312) (344) (271) (292) (304) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 14.1 (44.0) 23.7 18.8 17.3 Operating CFPS (sen) 9.18 8.32 8.61 9.05 9.36 Free CFPS (sen) 9.28 8.44 8.28 8.72 9.04 Target Price & Ratings History 1.68 1.58 1.48 RM 4 S.No. Date Closing Target Rating Price Price 1: 10 Aug 15 1.31 1.40 BUY 2: 21 Oct 15 1.31 1.35 HOLD 3: 28 Oct 15 1.30 1.35 HOLD 4: 27 Apr 16 1.51 1.45 HOLD 1.38 2 1.28 1 3 1.18 Jun-15 Oct-15 Feb-16 Jun-16 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Research Page 17
Malaysia Company Guide Pavilion REIT Version 4 Bloomberg: PREIT MK Reuters: PREI.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 28 Jun 2016 BUY Last Traded Price: RM1.70 (KLCI : 1,629.52) Price Target : RM1.85 (9% upside) (Prev RM1.75) Potential Catalyst: Yield-accretive asset injections Where we differ: Largely in line with consensus Analyst Inani ROZIDIN +603 2604 3905 inanirozidin@alliancedbs.com Price Relative 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 RM 1.1 80 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Pavilion REIT (LHS) Relative KLCI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F Gross Revenue 414 498 586 612 Net Property Inc 292 350 415 434 Total Return 282 265 302 320 Distribution Inc 249 272 310 328 EPU (sen) 8.00 8.76 9.55 10.1 EPU Gth (%) 4 10 9 6 DPU (sen) 8.25 8.91 9.71 10.3 DPU Gth (%) 4 8 9 6 NAV per shr (sen) 128 127 128 127 PE (X) 21.3 19.4 17.8 16.8 Distribution Yield (%) 4.9 5.2 5.7 6.0 P/NAV (x) 1.3 1.3 1.3 1.3 Aggregate Leverage (%) 15.9 25.9 30.4 30.4 ROAE (%) 6.3 6.9 7.7 7.9 Distn. Inc Chng (%): - - - Consensus DPU (sen): 8.90 9.70 10.2 Other Broker Recs: B: 7 S: 0 H: 3 Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P 220 200 180 160 140 120 100 Backed by premium assets TP raised on lower risk-free rate assumption. Given the prevalent risk-off environment particularly following the Brexit and expectation of continued easy monetary policies, our house risk-free rate assumption (based on 10-year MGS yield) has been lowered to 4.0% (from 4.3%). Potential upside in new acquisition plan. PavREIT s core asset is the 1.3m-sq-ft NLA Pavilion KL mall. The premium profiling and location have led to strong average rental rates of above RM20psf, as well as justify its premium valuation over other large-cap M-REITs. The da:men USJ mall opened its doors on 8 Jan 2016 with more than 50% occupancy. Management is positive about the mall s prospect as occupancy has since reached 85% and the acquisition was completed in 1Q16. Another of PavREIT s acquisitions, Intermark Mall for RM160m, was also completed in 1Q16. Expecting contribution from 2Q16 onwards, we estimate da:men USJ and Intermark Mall to generate NPI of RM31.1m (+9.8%) in FY16F and RM42.4m (+11.1%) in FY17F. In our view, PavREIT is likely to continue its acquisition trail with the soon-to-be-completed Pavilion Extension, to which it has the right of first refusal (ROFR). More ROFRs to prime assets. The two remaining ROFR assets are the 250k-sq-ft NLA Pavilion Extension and 300k-sq-ft Fahrenheit88 mall, currently held by major shareholders of PavREIT. Both could see valuations around or above the RM600-700m range due to their prime location near Pavilion KL, which can support rental rates of >RM20psf/mth. We have imputed the Pavilion Extension acquisition in FY17, though we conservatively forecast a low initial DPU accretion of <1%. Valuation: Our DDM-derived TP is revised to RM1.85, following the change in our risk-free rate assumption, with 7.4% cost of equity and 1.50% terminal growth. We reiterate our BUY recommendation on the basis of potential DPU accretion from the proposed acquisition of the Pavilion Extension. Key Risks to Our View: Underperformance of new assets. We based our assumptions on the positive performance of the acquisitions (da:men USJ and Intermark Mall) and we forecast both to be immediately accretive. In the event the new assets underperform due to lower-than-expected occupancy levels and rental reversions, its earnings may come in below our expectations. At A Glance Issued Capital (m shrs) 3,020 Mkt. Cap (RMm/US$m) 5,134 / 1,255 Major Shareholders (%) Qatar Holdings 36.1 Siew Choon Lim 28.2 Yong Tan Kewi 9.4 Free Float (%) 26.3 3m Avg. Daily Val (US$m) 0.32 ICB Industry : Real Estate / Real Estate Investment Trusts ed: CK / sa: BC
4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Company Guide Pavilion REIT CRITICAL DATA POINTS TO WATCH Earnings Drivers: Rental reversion pace to moderate. The positioning and good location of the 1.3m-sq-ft NLA Pavilion KL (PKL) mall enable the asset to deliver strong rental reversions on expiring tenancies. However, we expect the rental reversion pace to moderate ahead, as the weaker consumer sentiment continues to hurt retail sales. There are already visible signs average rent had increased by a slower 9% in 2014 from 15% in 2013, because of the more subdued general economy. We expect reversion rates to further moderate to c.9% in FY16. Stable occupancy levels. The PKL mall normally registers peak occupancy levels of above c.98% because of its much soughtafter location. And occupancy should remain stable as retailers would want to maintain a presence in the key Bukit Bintang shopping district even if there is a temporary slowdown in spending. Lease expiries are also weighed towards 2016, with 67% of NLA up for renewal compared to only 18% in 2015. New asset contribution. PavREIT completed two acquisitions in 1Q16. The first acquisition completed is the RM488m da:men USJ mall. The deal and pricing were contingent upon 85% secured occupancy, RM9.20psf/mth average rent, and completion of 1,672 car park bays. Intermark Mall is the second acquisition completed for RM160m with c.74% secured occupancy, RM7.21psf/mth average rent, and 367 parking bays. In our forecasts, we assume occupancy of 85%/90% in FY16/17F, as management works towards its target of near-full occupancy; and assume a reversion rate of 10% on expiring leases for these two assets due to their moderate rental rates despite being well-located. Earnings from both assets are expected to filter in from 2Q16 onwards. On the other hand, we estimate da:men USJ and Intermark Mall to generate NPI of RM31.8m (+10%) in FY16F and RM43.6m (+11.4%) in FY17F. Similar-themed asset from sponsor. PavREIT is granted ROFR to the Pavilion Extension which is currently being developed by Urusharta Cemerlang (KL) Sdn Bhd, a property development firm controlled by PavREIT s major shareholder Datuk Desmond Lim Siew Choon. The asset will be a 10-storey, c.250k-sq-ft NLA retail space next to Pavilion KL. It will share the same design quality as the latter and will be connected via an underground walkway. With completion expected in mid- to late-2016, this could be an immediate acquisition prospect as it will be integrated with PKL which has a long waiting list for space. In our forecasts, we imputed NPI of c.rm40m from the Pavilion Extension acquisition in FY17, based on an NPI yield of 6.35% and 70:30 debt-to-equity structure. RM m 500 450 400 350 300 250 200 150 100 50 0 78 76 74 72 70 68 66 64 0.9 0.8 0.7 0.6 0.5 0.4 0.3 (x) 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Net Property Income and Margins (%) Net Property Income and Margins (%) Distribution Paid / Net Operating CF Interest Cover (x) 76.8% 74.8% 72.8% 70.8% 68.8% 66.8% Net Property Income Net Property Income Margin % Net Property Income Net Property Income Margin % (x) 76% 74% 72% 70% 68% 66% 64% Minor office exposure. PavREIT also owns the 165k-sq-ft NLA Pavilion Office Tower, which contributes c.2% to its topline and NPI. It is currently about 90% occupied, and management has indicated that incoming new tenants would push occupancy to 98%. Page 19