MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 IPO Monday, 3 September 2012 FBM KLCI: 1,646.11 Sector: REIT IGB Real Estate Investment Trust Fair Value: RM 1.45 Largest REIT by Market Capitalisation Main Market Listing THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Not Rated Thiam Chiann Wen +603-2072-1277 ext:1664 cwthiam@ta.com.my www.taonline.com.my Background IGB REIT s portfolio comprises two assets, namely Mid Valley Mega Mall and The Gardens Mall, with a combined NLA of over 2.5mn sq ft. Based on the IPO price of RM1.25, IGB REIT s market capitalization would be RM4.3bn, making it the largest listed Malaysian REIT. IPO Structure Categories No of units (mn) Proposed Retail Offering: Malaysian public (via balloting) 34 Reserved units - eligible directors and employees 47 - eligible shareholders of IGB 120 201 Proposed institutional offering 469 670 Investment Case Prime assets with strategic location, huge catchment area and wellconnected transportation networks Diverse based of tenants to sustain rental income Future acquisition underpinned by low gearing and sponsor s pipeline assets Share Information Listing Main Market Enlarged Share Capital (mn) 3400 Market Cap @ RM1.25 (RM mn) 4250 Par Value (RM) 1.00 Issue price (RM) 1.25 Oversubscription rate N/A Estimated free float (%) 49.0 Tentative listing date Tentative Listing Dates Event Opening of the Retail offering Opening of the Institutional offering Closing of the Retail offering Closing of the Institutional offering Price Determination Date Balloting of Applicants Allotments of shares Listing 21-Sep-12 Tentative Date 27-Aug-12 28-Aug-12 4-Aug-12 6-Sep-12 6-Sep-12 7-Sep-12 20-Sep-12 21-Sep-12 Forecast and Valuation For FY13-14, we expect total revenue to grow by 4.0% per annum and NPI margin to range between 67-68%. As the trust intends to pay out 100% of its distributable income as dividend, we project IGB REIT to pay out 6.9-7.2sen per unit in FY13 and 14, which translates to DPU yield of 5.6% and 5.8% respectively based on the IPO price of RM1.25. We derive a fair value of RM1.45 based on DDM approach with a required rate of return and terminal growth rate of 7.3% and 2.5%. Earnings Summary (RM mn) FYE Dec FY10A FY11A FY12F FY13F FY14F Gross Rental Income 346.0 375.4 403.6 417.9 433.2 Net Property Income 218.0 250.4 272.7 283.9 296.1 NPI Margins 63.0 66.7 67.6 67.9 68.3 Pretax profit 192.9 203.6 215.1 Core Net Profit 192.9 203.6 215.1 Distributable income 225.8 238.0 250.1 EPU (Sen) 5.7 5.9 6.2 EPU Growth (%) na 4.9 5.0 PER (x) 22.1 21.1 20.0 DPU (sen) 6.6 6.9 7.2 Div Yield (%) 5.3 5.6 5.8 Source: Company, TA Securities Background Page 1 of 7 Ratio & Analysis NAV per share (post IPO) (sen) 1.00 Price to NAV(x) 1.26 Proforma ROE (%) 5.7 Proforma ROA (%) 4.1 Proforma Gearing (x) 0.26 Utilisation of Proceeds RM(mn) % Accrue to Offeror 837.5 100.0
IGB REIT s portfolio comprises two assets, namely Mid Valley Mega Mall and The Gardens Mall. The two malls have a combined NLA of over 2.5mn sq ft and are part of Mid valley city, which is one of the largest mixed use development in Malaysia spanning a 50-acre site. Refer to Appendix A for details of the assets. Scheduled to be listed on 21 Sep 2012, IGB REIT will be the second largest REIT in Malaysia, with estimated total assets under management of RM4.6bn, after Sunway REIT s RM4.63bn. Based on the IPO price of RM1.25, IGB REIT s market capitalization would be RM4.3bn, making it the largest listed Malaysian REIT. Figure 1: Trust Structure Figure 2: MREITs by retail exposure IPO Structure IGB REIT s IPO consists of institutional offering and retail offering, totaling up to 670mn new shares see Table 1. Out of these, 469 million units are offered to Malaysian and foreign institutional and selected investors and a retail offering of 201 million units to the public, eligible directors and employees of the group. The institutional price will be determined by way of book building while for the retail application, it is payable at RM1.25 upon application. If the final retail price is lower, the difference will be refunded. Page 2 of 7
Table 1: IPO Structure Categories Proposed Retail Offering: No of units (mn) % of total issued units Malaysian public (via balloting) 34 1.0 Reserved units - eligible directors and employees 47 1.4 - eligible shareholders of IGB 120 3.5 201 5.9 Proposed institutional offering 469 13.8 670 19.7 Unit consideration 2730 80.3 Total Unit in issue 3400 100.0 Investment Case Prime assets with strategic location, huge catchment area and wellconnected transportation networks Diverse based of tenants to sustain rental income Future acquisition underpinned by low gearing and sponsor s pipeline assets Prime asset with strategic location, huge catchment area and wellconnected transportation networks. The prized assets are part of Mid Valley City, one of largest mixed-use development in Malaysia spanning a 50 acre site combining retail, leisure, dining, entertainment, beauty and well-being, hospitality, commercial offices and an exhibition centre. We like both malls under the management of IGB REIT and believe they are one of the best one-stop shopping, dining and entertainment experience in the Klang Valley. Mid Valley City s strategic location nearby KLCC and various suburbs of Kuala Lumpur making it a preferred shopping destination for residents of the Klang Valley. The footfall in Mid Valley Megamall Mall and the Gardens Mall is estimated at 34.7mn in 2011 on a combined basis. This puts the footfall of both the malls among the top in Malaysia, as compared to other malls such as Suria KLCC s >40mn, Pavilion Kuala Lumpur s >31mn, Sunway Pyramid s >34mn and Sungei Wang Plaza s >23mn. Mid Valley City is accessible through a network of 5 major road systems and multiple modes of public transportations, including a KTM Komuter railway line. The upcoming MRT 2 Circle line, which will link areas such as Mid Valley City, Mont Kiara, Sentul Timur, Ampang and Matrade Development is expected to further drive shopper traffic to Mid Valley City. We believe the strategic location of Mid Valley City would continue attracting the massive population in the suburbs, and also from the city. Diverse based of tenants to sustain rental income IGB REIT portfolio posted improved rental income for the past years, supported by a diverse base of tenants, high occupancy and increasing rental rates. IGB REIT s gross rental income is well distributed within its portfolio of 663 tenants as at 31 May 2012. The key tenants of the subject properties include well-known retailers, such as AEON, Carrefour, Metorjaya and Isetan. As at 31 May 2012, no single tenant contributed more than 6.0% of gross rental income. The top 10 tenants of the subject properties contributed an aggregate of approximately 18.5% to Gross Rental Income and occupy an aggregate of 47.3% of NLA. Page 3 of 7
Due to its prime location, occupancy rates have consistently stayed above 96%, not to mention it has a large available pool of potential on the waiting list. Given the highly demand retail spaces, average monthly gross rental income psf at Mid Valley Megamall and The Gardens Mall has also risen steadily, recording an average rental growth of 5.2% and 7.3% p.a respectively since 2009. Future acquisitions underpinned by low gearing, sponsor s pipeline assets Based on IGB REIT s Pro Forma Statement of Financial position, IGB REIT s gearing ratio upon listing will be approximately 25.8%, which is below the average of listed MREITs of approximately 29.2% as at 31 Dec 2011. Hence, for future acquisition, IGB REIT has the flexibility to borrow additional RM1.1bn before reaching the statutory gearing level of 50%. The manager is looking at acquiring assets in the future to enhance the value of the REIT. IGB REIT has the right of first refusal (ROFR) to acquire its sponsor s future retail properties and mixed-use developments with a retail component. We believe the recent partnership between its sponsor and a Johor State Government Linked Company to jointly develop Southkey Megamall, a retail mall and mixed development (70:30 basis, GDV: RM6bn) will serve as IGB REIT s future acquisition target. Risks 1) Asset concentration The financial performance of IGB REIT will be seriously affected should there be any unforeseen events occur in that area, such as terrorist attacks, natural disasters, gas explosion that could cause physical damage to the malls and thus result in disruption to the business and operations of tenants. 2) Rising retail supply According the independent property market report, there is a potential dilution of retail market share, as there are 23 developments with total NLA of 12.75mn sq. ft. of NLA under construction and scheduled to open by 2015 in the Klang Valley. Financial Highlight IGB REIT s total revenue increased 7.1% p.a for period 2009-2011, which was mainly attributable to higher rental rates for new and renewing tenants. Higher turnover rent and lower rent rebates at the Gardens also contributed to the increase. The portfolio achieved better margins in 2011 due to higher rental reversion from major tenancies renewals that took place at the Mid Valley Megamall. Figure 3: Financial Performance Page 4 of 7
Earnings Forecast For FY13-14, we expect total revenue to grow by 4.0% and NPI margin to range between 67-68%, assuming the expiring leases to be renewed at a 5% increase in base rent at Mid Valley Megamall and 15% increase in base rent at The Gardens Mall. Going forward, the earnings growth of IGB REIT is expected to come from (i) higher rental reversion; (ii) consistently achieve full occupancy; and (iii) internal and/or external acquisition. Distribution Policy IGB REIT intends to distribute 100% of its distributable income for FY12-14. Thereafter, it intends to distribute at least 90% of its distributable income for each subsequent financial year, on a half yearly basis. We project IGB REIT we project the trust to pay out 6.9-7.2sen per unit, representing 100% of its distributable income to unitholders. This translates to DPU yield of 5.6% and 5.8% respectively based on the IPO price of RM1.25. Valuation We derive a fair value of RM1.45 based on DDM approach with required rate of return and terminal growth rate of 7.3% and 2.5% respectively. Earnings Summary (RM mn) FYE Dec FY10A FY11A FY12F FY13F FY14F Gross Rental Income 346.0 375.4 403.6 417.9 433.2 Net Property Income 218.0 250.4 272.7 283.9 296.1 NPI Margins 63.0 66.7 67.6 67.9 68.3 Pretax profit 192.9 203.6 215.1 Core Net Profit 192.9 203.6 215.1 Distributable income 225.8 238.0 250.1 EPU (Sen) 5.7 5.9 6.2 EPU Growth (%) na 4.9 5.0 PER (x) 22.1 21.1 20.0 DPU (sen) 6.6 6.9 7.2 Div Yield (%) 5.3 5.6 5.8 Source: Company, TA Securities Peers Comparison Price Target price Market Cap (RM) (RM) (RM bn) CY12 CY13 CY12 CY13 CY12 CY13 Sunway REIT 1.44 1.53 3.88 11.2 6.7 19.5 18.3 5.4 5.6 CMMT 1.69 1.81 2.98 5.9 4.5 21.7 20.7 4.9 5.1 IGB REIT 1.25 1.45 4.25 na 4.9 22.1 21.1 5.3 5.6 Pavilion REIT 1.34 na 4.02 na 5.0 21.1 20.0 4.9 5.2 Average 21.1 20.0 5.1 5.4 Source: Bloomberg, TA Securities EPS growth (%) PER (x) Div Yield (%) Page 5 of 7
Appendix A: Mid Valley Megamall Description Mid Valley Megamall, a five level retail mall with one mezzanine floor, two levels of basement car park and four levels of elevated park, is completed in 1999. It is part of a mixed development comprising three office towers and two hotels. Mid Valley Megamall houses a convention centre measuring approximately 66,395 sq ft in area. Key Statistics Land Area (sq ft) 1,047,532 Year of completion 1999 GFA (sq ft) 6,107,103 NLA (sq ft) 1,718,951 Number of car Park Bay 6,092 Appraised Value as at 10 Apr 012 Purchase Consideration RM 3,440 mn RM 3,440 mn Number of tenancies as at 31 May 2012 454 Occupancy Rate as at 31 May 2012 (%) 99.8 Figure 4 : Trade mix analysis by NLA occupied (%) Figure 5: Tenancy Expiry Profile by NLA occupied (%) Figure 6: Top 10 tenants of Mid Valley Megamall (% of NLA) Figure 7: Asset Performance Page 6 of 7
The Gardens Mall Description The Gardens Mall, an eight level retail mall together with four levels of basement car park and four levels of elevated car park, is completed in 2007. It is part of a mixed development comprising two office towers, a block of residential suites and a five-star hotel. Key Statistics Land Area (sq ft) 421,773 Year of completion 2007 GFA (sq ft) 3,379,510 NLA (sq ft) 817,053 Number of car Park Bay 4,128 Appraised Value as at 31 May 2012 Purchase Consideration RM 1,160 mn RM 1,160 mn Number of tenancies as at 31 May 2012 209 Occupancy Rate as at 31 May 2012 (%) 99.7 Figure 8: Trade mix analysis by NLA occupied (%) Figure 9: Tenancy Expiry Profile by NLA occupied (%) Figure 10: Top 10 tenants of Mid Valley Megamall (% of NLA) Figure 11: Asset Performance Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. forta SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of BursaMalaysia Securities Berhad) Kaladher Govindan Head of Research Page 7 of 7