PROPERTY IGB CORPORATION (IGB MK, IGB.KL) 6 January 2012

Emerging from the value trap! Company report BUY

Benny Chew, CFA/ Nik Ikhwan (Upgraded) [email protected] +603 2036 2299 Rationale for report: Company Update

Price RM2.49 Investment Highlights Fair Value RM3.50

52-week High/Low RM2.66/RM1.76 • We are upgrading IGB Corporation (IGB) from HOLD to Key Changes BUY, and raised our fair value from RM2.30/share to Fair value  RM3.50/share based on a 22% discount to our NAV of EPS unchanged RM4.50/share.

YE to Dec FY10 FY11F FY12F FY13F • IGB is distinctively undervalued (consensus NAV: RM3.80- RM4.80) despite its portfolio of prime properties. But, the Revenue (RMmil) 719.4 723.8 790.1 823.5 lack of proactive initiatives to crystallise its deep- Core net profit (RMmil) 174.3 171.9 182.3 187.0 EPS (Sen) 11.7 11.4 12.1 12.4 embedded value has engendered a ‘value trap’ stigma. EPS growth (%) 9.7 (2.1) 5.8 2.6 This would soon change, we believe. Consensus EPS (Sen) 13.1 14.5 15.5 DPS (Sen) 2.5 2.5 2.5 2.5 • Triggered by the high implied capital values evident in the PE (x) 21.4 21.8 20.6 20.1 recent listing of Pavilion REIT and CapitaMall Trust and a EV/EBITDA (x) 11.3 12.0 11.0 10.7 flat interest rate cycle, IGB may be moving to optimise the Div yield (%) 1.0 1.0 1.0 1.0 ownership structure of its prime properties by embracing ROE (%) 5.6 5.2 5.2 5.1 Net Gearing (%) 10.0 6.3 11.7 9.2 REITs as tax-efficient vehicles to house its assets.

Stock and Financial Data • The monetisation move would unleash a significant revaluation surplus from assets re-pricing, and free up Shares Outstanding (million) 1,490.3 capital for redeployment. The retail REIT comprising Market Cap (RMmil) 3710.1 MegaMall and Gardens Mall – currently parked under Book value (RM/share) 2.08 KrisAssets – is likely to be first off the block. P/BV (x) 1.2 ROE (%) 6.6 Net Gearing (%) 4.2 • The total accretion to IGB from the listing of the retail REIT is estimated to be about RM1.18bil (or 59 sen/share). IGB Major Shareholders Tan Family (37.0%) may also rake in between RM465m and RM1.4bil cash, EPF (6.2%) depending on its equity stake in the REIT.

Free Float (%) 63.0 • This is a further RM1.05bil revaluation surplus in IGB’s Avg Daily Value (RMmil) 3.3 under-appreciated portfolio of well-occupied office Price performance 3mth 6mth 12mth buildings (2.2msf), which are carried in its book at low historical costs. The retail REIT may be the trailblazer for Absolute (%) 10.8 6.1 12.5 IGB to launch an office REIT further out. Relative (%) 9.4 11.9 15.2 • A hospitality REIT for its hotel assets would complete the 4.00 1,674 re-pricing of its assets, transforming IGB to an asset-light fee-based entity with controlling stakes in three listed asset-specific REITs. 3.00 1,431 • nI NAV realisation and expectations of a cash payout to d e ) x minorities would be the primary valuation drivers in the M P R 2.00 1,187 o ( ni st near term. IGB would need to a delicate balance between a special dividend and deploying freed capital to fund development projects overseas; it is exploring the 1.00 944 depressed property market in London. • 0.00 700 With the exception of the EPF with a 6% stake, IGB is very D J D J D J D J D J D u u u u u e ce n ce n ce n ce n ce n c - 0- - 0- - 0- - 1- - 1- 1- under-owned by the other local institutional funds. Foreign 60 7 70 8 80 9 90 0 01 1 1 ownership appears high at 35% as of December 2011. IGB FBM KLCI

• The primary risk to our investment thesis is the abolition of its plan to launch a retail REIT or protracted delays in its timing. But at 45% discount to our NAV currently, the PP 12247/06/2012 (030106) balance of risk is on the upside.

IGB Corporation 6 January 2012

WHAT HAVE CHANGED? TABLE 1 : IMPLIED CAPITAL VALUES (RMPSF) KrisAssets IGB Corporation (IGB) is the country’s leading landlord Share price, as at 5 Jan 2012, (RM) 6.18 with a valuable portfolio of prime investment properties, comprising 2.6msf of retail, 2.2msf of office and hotel Paid-up capital, (m) 440.4 assets. Having spent the last decade developing its Market capitalization, (RM mil) 2721.9 flagship Mid-Valley City into a vibrant retail and add: Net debts, as at end-Sept11, (RM mil) 658.6 commercial hub, this massive integrated project is at the Enterprise v alue, (RM mil) 3380.5 tail-end of its project life cycle with only two more acres Net lettable area, (msf) for development –earmarked for an office tower.. - Mid-Valley MegaMall 1.77 - The Gardens Mall 0.82 Despite IGB’s status as a ‘blue-chip’ developer/landlord Total 2.59 with an impeccable execution track record in creating value for its landbank, IGB has consistently traded at Implied capital value psf (RM) 1305.2 ‘huge’ discounts to NAVs because it seemingly lacks the initiatives to realise the deep-embedded value of its CapitaMall Trust portfolio of prime investment properties. We also believe Share price, as at 5 Jan 2012, (RM) 1.44 that IGB’s corporate structure is not efficient. The retail Paid-up capital, (m) 1,762.7 assets – Mid-Valley MegaMall and The Gardens Mall – Market capitalization, (RM mil) 2,538.2 are held under its thinly-traded 75%-owned KrisAssets add: Net debts, as at end-Sept11, (RM mil) 656.2 Bhd, while the office and hotel assets are housed under IGB. Hence, there is no tax transparency on its rental Enterprise v alue, (RM mil) 3,194.5 income. For these reasons, IGB is often perceived to be Net lettable area, (msf) ‘a value trap’. - Sg Wang 0.5 - 0.8 This would soon change, we believe. The next growth - Mines 0.7 phase would see IGB moving to optimise the ownership - East Coast Mall 0.4 structure of its investment properties via the Implied capital value psf (RM) 1,299.0 establishment of REITs as tax-efficient vehicles to recycle its capital currently tied up in its retail, office and hotel assets. The retail REIT comprising MegaMall and Pavilion REIT Gardens Mall – currently parked under KrisAssets, is Share price, as at 5 Jan 2012, (RM) 1.06 likely to be first off the block . Paid-up capital, (m) 3,000.0 Market capitalization, (RM mil) 3,180.0 COMPARING THE IMPLIED CAPITAL VALUE OF add: Net debts, as at end-Sept11, (RM mil) 651.5 KRISASSETS TO THAT OF CAPITAMALL TRUST Enterprise v alue, (RM mil) 3831.5 AND PAVILION REIT Net lettable area, (msf) - Pavilion Mall 1.3 In our opinion, the primary reason for this change in - Pavilion Tow er 0.2 mindset may be triggered by the strong market response to the recent listing of Pavilion Retail REIT, as well as the Implied capital value psf (RM) 2550.1 yield compression on select well-managed REIT Source: Company / AmResearch including CapitaMall Trust. Furthermore, in an environment where the interest rate cycle is expected to remain flat at best, we expect sustained buying interests on the REITs. This means that IGB would be able to SHIFTING THE OWNERSHIP STRUCTURE OF extract generous valuations for its assets by divesting RETAIL ASSETS FROM COMPANY TO A RETAIL them to the REITs. REIT

As shown in Table 1, the implied capital value of In our opinion, the first leg of the transformation would KrisAssets is only about RM1,305psf, or almost one-half involve shifting the ownership structure of its retail assets of Pavilion REIT’s implied capital value of RM2,550psf. – Mid-Valley MegaMall (1.77msf) and Gardens Mall Admittedly, Pavilion REIT’s rental reversion cycle is (0.82msf) – currently held under its 75%-owned relatively stronger because its retail mall appears to be KrisAssets to a retail REIT. Such a corporate ‘under-rented’ at this early stage of its life cycle. restructuring would involve a share swap whereby the Nonetheless, we believe that the rental cycle at Mid- shareholders of KrisAssets would migrate to the newly Valley MegaMall is more defensive because it caters established retail REIT. The establishment of a retail more to non-discretionary spending and is strategically REIT has several positive implications on IGB. located within prime neighbourhoods. Our recent visit revealed that management is targeting to grow rentals at  Strong demand expected for Mid-Valley MegaMall Mid-Valley by a ‘high-single’ digit from 2012 onwards. and Gardens Mall

The implied capital value for CapitaMall Trust is a tad We have built a scenario analysis to reflect the cash lower at about RM1,299psf. This is justified because two flows of a retail REIT comprising Mid-Valley MegaMall of its retail malls – The Mines and East Coast Mall – are and Gardens Mall based on certain assumptions. We located in less desirable locations.

AmResearch Sdn Bhd 2 IGB Corporation 6 January 2012 note that the direct comparables are CapitalMall Trust the retail assets under KrisAssets to a REIT. and Pavilion REIT. Based on their last traded unit prices, the implied distribution yields for CapitaMall Trust and See table 4: Estimating revaluation surplus from the Pavilion REIT are 5.7% and 5.2%; respectively. establishment of a retail REIT CapitaMall Trust has a net gearing of 35.5%, while Pavilion REIT’s net gearing is about 20% (please see table 2).

TABLE 2 : DISTRIBUTION YIELD & NET GEARING – CMMT AND PAVILION REIT CapitaMall M'sia Trust Pavilion REIT Unit price, as at 5 Jan 2012, (RM) 1.43 1.07 Estimated DPU, (sen) - FY12F 8.2 5.6 DPU yield, (%) 5.7 5.2 Net gearing, (%) 35.5 20

Source: Company / AmResearch

Even though the average implied distribution yield for CapitaMall Trust and Pavilion REIT is currently about 5.5%, we believe that the market would be receptive to an IPO of a Mid-Valley REIT paying a distribution yield of about 6% given the quality of its underlying retail assets and strategic location. Scarcity premium is another reason, as there are not many quality REIT listings in the market.

 Revaluation surplus of RM1.18bil from the optimisation of its ownership structure of retail assets to a retail REIT

Our scenario analysis shows that the reshuffling of the retail assets – Mid-Valley MegaMall and Gardens Mall – from KrisAssets to a REIT would create a surplus valuation of an estimated RM1.18bil on the assets because of the tax transparency on its rental income and yield uplift from leverage. At the parent IGB level, we estimate that the surplus accretion to be about RM885mil (or RM0.59/share based on its 75% stake in KrisAssets) from the optimisation of its corporate structure by moving TABLE 3: PROJECTED DISTRIBUTION YIELD FOR A RETAIL REIT – AND GARDENS MALL FY12F Assumptions Gross rev enue - MegaMall 232.6 Av erage gross rental of RM10.95psf - Gardens Mall 98.0 Av erage gross rental of RM9.95psf 330.6 Property operating costs (82.7) Pegged to 25% of gross rev enue Net property income 248.0 Less: - Interest ex pense (58.8) Effectiv e interest rate of 4.9% - Manager fees (19.4) 0.3% of assets under management plus 3% of NPI - Trust fees (1.2) 0.03% of assets under management Distributable income 168.5 Equity base, (RM mil) 2,800 Distribution yield 6.0% 100% distribution Source: Company / AmResearch

AmResearch Sdn Bhd 3 IGB Corporation 6 January 2012

TABLE 4: ESTMATING REVALUATION SURPLUS FROM THE ESTABLISHMENT OF A RETAIL REIT Estimated market value, (RM mil) 4,000 MidValley MegaMall and Gardens Mall - Equity (70%) 2,800 - Debts (30%) 1,200 Total net lettable area, (msf) 2.6 MidValley MegaMall (1.77msf) and Gardens Mall (0.82msf) Implied capital v alue (RM psf) 1,538

Book value of retail malls, (RM mil) As at September 2011 - MidValley MegaMall 2,000 or RM1,130psf - Gardens Mall 820 or RM999psf 2,820 or RM1,085psf 1.Rev aluation surplus from conv ersion of 1,180 Estimated market v alue less book cost of malls KrissAssets into a retail REIT, (RM mil)

2. IGB's share of the surplus, (RM mil) 885 Based on IGB's 75% stake in KrisAssets 3. Per share accretion to IGB, (RM) 0.59 Based on IGB's paid up capital of 1,490m

Source: Company / AmResearch

 Implied capital value to expand to RM1,538psf Table 5: Accretion to IGB from the listing of a retail REIT Under the REIT structure, the implied valuation of Mid- Valley MegaMall and Gardens Mall would expand to HOW MUCH WOULD IGB RAISE FROM THE about RM4.0bil (or RM1,538psf), compared with its book LISTING OF THE REIT? cost of RM2.82bil (or RM1,085psf). The table below shows the potential funds to be raised by Furthermore, we note that IGB would also enjoy an IGB from the transfer of its retail assets from KrisAssets annual recurring management fee of RM19mil from the to a retail REIT. Under scenario 1, we assume that IGB management of the REIT (assuming that IGB owns 100% would retain an unchanged 75% stake in the retail REIT. of the management entity). The annual after tax Such a move would see IGB raising some RM465mil or management fees work out to be about RM14mil. Based about RM0.31/share. on a PE multiple of 20x, this income stream is worth at least RM285mil. Under Scenario 2, we have assumed that IGB would dilute its stake in the retail REIT to 51% where the group  The accretion to IGB is about 32% of its current would be able to raise a sizable RM1.42bil, or market capitalisation! RM0.96/share.

The table below shows the total potential accretion to Unlike its 75% shareholding in KrisAssets, we believe IGB’s current market capitalisation from the conversion of that IGB would likely hold a significantly lower equity KrisAssets to a REIT. The potential accretion is very stake in the retail REIT because of the need to fund significant, adding about 32% to IGB’s current market future acquisitions. The floor is likely to be about 51% for capitalisation. control reasons. Hence, we reckon that IGB’s equity stake in the retail REIT may be between 51%-75%, TABLE 5: ACCRETION TO IGB FROM THE LISTING OF A implying the potential funds to be raised from the listing of RETAIL REIT the retail REIT at between RM465mil and RM1.42bil.

Share price, as at 5 Jan 2012, (RM) 2.48 Table 6: Funds to be raised for IGB from the listing of Paid-up capital (m) 1,490 the retail REIT

Current market capitalization 3695.2 CASH PAYOUT TO IGB’S MINORITIES? add: As we have highlighted above, IGB stands to reap a lot of 1. Estimated surplus from the revaluation of Mid-Valley MegaMall and Gardens Mall, (RM mil) 885 monies by optimising its ownership structure of its retail (Based on IGB's 75% stake in KrisAsset) assets by shifting them from KrisAssets to a retail REIT, and listing the latter. Based on our estimates, IGB may 2. Capitalized net management fees of RM14m pa at 20x, (RM mil) 285 extract between RM465mil and RM1.42bil cash, Enlarged market capitalization, (RM mil) 4865.2 depending on its equity stake in the REIT. The follow- up question is this: Would there be a ‘bumper’ cash payout Potential accretion to IGB's market capitalization 32% to shareholders of IGB?

Source: Company / AmResearch

AmResearch Sdn Bhd 4 IGB Corporation 6 January 2012

TABLE 6: HOW MUCH WOULD IGB RAISE FROM THE LISTING OF ITS RETAIL REIT? KrisAsset's share price, as at 5 Jan 2012, (RM) 6.18 Paid-up capital, (m) 440.4 Market capitalization, (RM mil) 2721.672 add: Net debts, as at end-Sept11, (RM mil) 658.6 Enterprise value, (RM mil) 3380.3 IGB's share of KrisAssets' enterprise v alue @ 75% 2535.2

Scenario 1: Assuming IGB retains an unchanged 75% stake in the REIT Enterprise value of the retail REIT , (RM mil) 4,000 IGB's share of the enterprise v alue of the retail REIT @ 75% 3,000 Funds raised for IGB, (RM mil) 465 Per IGB share, (RM) 0.31

Scenario 2: Assuming IGB dilutes its stake to 51% in the REIT Enterprise value of the retail REIT , (RM mil) 4,000 IGB's share of the enterprise v alue of the retail REIT @ 51% 2,040 Funds raised for IGB, (RM mil) 1424.8 Per IGB share, (RM) 0.96 Source: Company / AmResearch

In our opinion, we do not believe that there would be a 90% occupied. More importantly, IGB has managed to very sizable cash payout to IGB’s minorities. We believe lock-in good average building rentals for both buildings of that management would likely redeploy the capital freed about RM6.50psf, which is comparable to similar Grade-A up from the monetisation of its retail assets. From our buildings in the Golden Triangle in the city centre. The recent visit, management hinted that the group is actively anchor tenants for the South Tower are BHP Biliton bidding for large mixed-use development projects in (40,000sf) and Rating Agency of (RAM). Both London and Taipei where the residential markets appear have signed on a 3+3 tenancy structure. The former was a to be bottoming out. We understand that IGB would new tenant while the latter was relocated from the city require about RM1.0bil to fund the acquisition of a site in centre. London. Meanwhile, Centrepoint North Tower (NLA: 231,115sf) and IGB would soon be embarking on its final development Centrepoint South Tower (NLA: 233,804sf) are fully project in Mid-Valley City, comprising an office-cum-retail occupied at an average rental of RM5.00psf. The group’s building with a total net NLA of 700,000sf (Office: other office buildings – Menara Tan & Tan and The Amp 550,000sf, retail: 150,000). The said building would Walk – in the city continue to deliver occupancy rates in commence construction in 1Q this year and is scheduled excess of 85%. for completion in 2014 at a cost of about RM300mil. IGB’s portfolio of office buildings are all carried in its book Historically, IGB’s dividend payout has been between at historical costs (see Table 7) of just RM550mil versus 18% and 20%. Dividend per share was about 2.5 sen in our estimated market value of RM1.61bil. For example, FY10, and is expected to remain flat at this level in The Gardens North Tower is carried in its book at just FY11F and FY12F. At best, there may be a special RM140mil or RM329psf, while Gardens South Tower is at dividend of between 15-20sen/share, we believe. RM136.9mil or RM335psf. This is despite both buildings enjoying excellent prime rentals of RM6-6.50psf. Based on HUGE REVALUATION SURPLUS OF RM1.05BIL capitalisation rates of between 6%-7%, the potential FROM ITS OFFICE ASSETS; LOOKING AT revaluation surplus is estimated to be about RM1.05bil, LAUNCHING AN OFFICE REIT representing almost 70 sen/share (or 28% of IGB’s current market capitalisation. The more significant valuation kicker may be IGB’s under- appreciated portfolio of office buildings, with a total net Management is also looking at the possibility of launching lettable area of 2.2msf located primary in Mid-Valley City. an office REIT, which would likely take place only after the We are somewhat surprised by the strength of the office debut of its retail REIT. Such a move would crystallise the rental market in Mid-Valley City, which has emerged as a deep-embedded value of its office assets. highly sought after decentralised office precinct. We attribute the strong rental demand to the rising maturity of Table 7: Estimated revaluation surplus on IGB’s the area, easy accessibility as well as the appeal of MidValley MegaMall and Gardens Mall. portfolio

Both the ‘Grade-A’ Gardens South Tower (NLA: 410,000sf) and Gardens North Tower (NLA: 423,000sf) are more than

AmResearch Sdn Bhd 5 IGB Corporation 6 January 2012

TABLE 7: ESTIMATED REVALUATION SURPLUS ON IGB’S PORTFOLIO Office NLA (sf) NBV as at 2010 (RM'mil) BV RMpsf Mkt value (RM'mil) Surplus RM'mil Plaza Permata 190,511 33.5 175.6 53.9 20.4 NOI @ cap rate of 7% Menara IGB 251,751 41.0 163.0 150.9 109.8 NOI @ cap rate of 6% Menara Tan & Tan 340,596 81.0 237.8 224.0 143.0 NOI @ cap rate of 6% Centrepoint South 233,804 59.7 255.2 172.3 112.7 NOI @ cap rate of 6.5% Centrepoint North 231,115 61.1 264.6 174.3 113.2 NOI @ cap rate of 6.5% Gardens North Tower 426,870 140.3 328.7 426.9 286.6 NOI @ cap rate of 6% Gardens South Tower 408,314 136.9 335.2 408.3 271.4 NOI @ cap rate of 6% Subtotal 553.4 1610.6 1057.1

Source: Company / AmResearch

MID VALLEY CITY MATURING WELL parties have agreed to share the costs of constructing the bridge.  Retail properties are of the  Strong office demand in Mid Valley City Mid Valley City is an integrated mixed-use development comprising retail, office, residential and hospitality Mid Valley City’s office market remains strong, in-line with properties, built on a 50-acre piece of prime land. the strong demand for suburban office space. This is mostly for companies that do not require being in Kuala IGB owns a valuable portfolio of assets boasting about 5 Lumpur City Centre’s Golden Triangle or Central Business million sf of net lettable area, comprising 2.2 million sf of District. office space and 2.6 million sf of retail space i.e. MidValley MegaMall and Gardens Mall. The most recently completed office buildings i.e. Gardens South and North Tower now enjoy strong occupancy at MidValley MegaMall, (NLA:1.7mil sf) the crown in the over 90% - versus 70% for North Tower at end-2010. jewel, continues to enjoy a strong occupancy rate (~100%) Average rental rates remain stable at RM6psf-RM6.50psf with average rentals of RM10.40psf. We estimate the mall which is comparable to buildings in the KL City Centre. generates a Net Operating Income (NOI) of between RM170mil and RM190mil every year. Other offices at Mid Valley City such as Menara IGB, Centrepoint North and South towers exhibit strong We understand that visitor traffic is about 30-35 million per occupancy rates as well at 96% to 100%. Lease rates for annum with anchor tenants that include Jusco, Metrojaya, these buildings are slightly lower at RM4.20psf to RM5psf Carrefour and Golden Screen Cinema. There were quite a given that these are not new buildings and we consider number of additions to the tenants list which include Cache these rates to be fair given it is located outside the KL City Cache, Citibank, Galactic Laser, The Library, S&J, Spoon, Centre. to name a few.  Another office asset for the final phase for Mid The Gardens Mall (currently 98% tenanted) recorded a Valley City 30% growth in revenue from the previous year due to a better tenant mix, while visitor traffic improved to 18 million Encouraged by the strong demand for office space within a year versus 12 to 15 million previously. A list of new the -Jln Abdullah Hukum area, most notably tenants recently brought in included Tod’s, Versace Jeans robust sales for S P Setia’s KL Eco City boutique offices and a furniture store called iwannagohome!. Gardens just next door (at RM1,000psf), IGB has opted to complete Mall’s performance remains solid at about 90% tenancy the Mid Valley City development with another office and the average rental rate remains at RM9.40psf. building. Recall that the remaining landbank was previously mooted for a high-rise residential development. There is further upside given that 60% of the lettable area was recently renewed. The bulk of this new lease rates will The last piece of land – measuring 1.4acres - in MidValley be seen in 2012 with management guiding a 10% YoY City has been approved for a 40-storey building (with some growth in income. In addition, there will be no more retail portion) but may be increased to 50 storeys rebates given to the tenants unlike in the first three years depending on approvals. of operation as the mall has stabilised and is starting to mature. To comprise 1.1 million sq ft of floor space (NLA of 700,000sf), we note that the group intends to include some Stronger traffic growth can be expected for these two retail exotic car showrooms, but everything is still in the planning malls when the office and residential properties at the process. Construction is expected to start by end-January neighbouring KL Eco City are ready. The RM6bil or early-February. development would certainly provide further catalysts for the retail market in Mid Valley City. There will be a This development will cost about RM500mil and is pedestrian bridge linking the two developments and both expected to be completed within 30 months or by 2014.

AmResearch Sdn Bhd 6 IGB Corporation 6 January 2012

TABLE 8: ESTIMATED NAV Asset % owned Method (RMmil) (RMmil) Development properties Melawati 100 480 SierraMas Park Manor 100 160 G Residence 100 380 Jln Tun Razak (Lot 15&16) 100 144 Other landbank - 850 acres in 100 At market v alue 92.6 Kundang 100 1200 3 Lorong Stonor 100 310 NPV at 10% 3,117 516.4

Investment properties (NLA sf) Office Plaza Permata 190,511 100 NOI @ cap rate of 7% 53.9 Menara IGB 251,751 100 NOI @ cap rate of 6.5% 140.0 Menara Tan & Tan 340,596 80 NOI @ cap rate of 6.5% 210.0 Centrepoint South 233,804 100 NOI @ cap rate of 6.5% 172.3 Centrepoint North 231,115 100 NOI @ cap rate of 6.5% 174.3 Gardens North Tower 426,870 100 NOI @ cap rate of 6.5% 426.9 Gardens South Tow er 408,314 100 NOI @ cap rate of 6.5% 408.3 Subtotal 1585.7

Retail Ampw alk-retail 62,771 100 NOI @ cap rate of 7% 31.6 Midvalley Megamall I 1,650,171 75 NOI @ cap rate of 6% 2331.7 The Gardens mall 833,854 75 NOI @ cap rate of 6.5% 845.2 Mid Valley Megamall I - 5917 car park bay s 75 RM35,000 per bay 155.3 The Gardens mall - 4128 car park bay s 75 RM35,000 per bay 108.4 Subtotal 3472.1

Hotels Cititel - 646 rooms hotel 100 RM300k per room 193.8 Boulev ard - 390 rooms 100 RM400k per room 156.0 MiCasa Hotel Apartments - 242 rooms 100 RM400k per room 96.8 Pangkor Island Beach Resort - 259 rooms 100 RM400k per room 103.6 Gardens - 5 star hotel - 430 rooms 100 RM700k per room 301.0 Gardens - 5 star serv ice apartments - 210 rooms 100 RM800k per room 168.0 Renaissance Hotel - 910 rooms 100 RM800k per room 728.0 MiCasa Hotel Apartments, Yangon - 139 rooms 65 RM300k per room 27.1 Cititel Ex press KL - 244 rooms 100 RM250k per room 61.0 Cititel Ex press Kota Kinabalu - 275 100 RM150k per room 41.3

Sub Total 1835.3 Gross Asset Value (GAV) 7409.6

Net cash/(debt) as at 31 December 2012 (707.8)

NAV (RMm) 6701.8 No.of shares (m) 1490.3 NAV/share (RM) 4.50 Current share price (RM) 2.48 Discount to NAV (%) -45% Source: Company / AmResearch

The land has a prime frontage of Federal Highway, thus  Hospitality division doing well has very strong visibility. IGB owns a total of 14 hotels under its portfolio with nine hotels at the subsidiary level – latest inclusion is Renaissance Hotel – with the remaining five at the associate level.

AmResearch Sdn Bhd 7 IGB Corporation 6 January 2012

IGB posted strong 9MFY11 earnings which were mainly LESS FOCUS ON DEVELOPMENT contributed by the hotel division. Operating income for the division jumped by half YoY on the back of stronger  Building niche boutique projects occupancy and room rates as Mid Valley City’s newer assets are maturing. IGB is now more known as an asset builder rather than a property developer. This is evident with the lack of Cititel KL, Boulevard Hotel and Gardens Hotel & launches over the past few years and it has not been Residences are the key assets driving the hotel division. aggressive in increasing its landbank – with about 1,000 Cititel and Boulevard have occupancy rates of over 80% acres remaining – albeit developable landbank or those and rates are ranging between RM180 and RM240 per with immediate development potential which only accounts room. Gardens Hotel & Residences although boasts a for about 40%. lower occupancy rate of about 60%, it yields stronger room rates (~RM300), being a 4-star hotel.  G Residences

 Expanding its St Giles brand G Residences – located in Desa Pandan - was launched in 4QFY11. It is located near the exclusive vicinity of the The group is looking at expanding its St Giles brand with embassy row and is just a few kilometres away from plans to set up a St Giles Hotel in every major city on all KLCC. five continents. We gather these hotels would be in small cities with about 350 to 400 rooms. Sitting on a 3.7acre piece of land, it boasts a GDV of RM360mil. The development comprises two 23-storey The most immediate one could be in Sydney, Australia blocks encompassing 472 serviced apartments units with whereby the group had submitted plans to the authorities build-ups starting from 1,410sf to convert a recently acquired office building into a 3- to 4- star St Giles Hotel with about 250 rooms. The building was Response has been very encouraging with 70% of the acquired for A$36mil and will be given a A$20mil available units already sold since its launch a month ago. makeover. It is located three to four blocks away from the Average selling price is RM650psf. We are not surprised Sydney Opera House and is located mid-way between the by the strong take-up rate given that the IGB has strong Sydney Opera House and the Queen Victoria building. followers due to quality end-products despite G Residence having a leasehold tenure. There will be more hotels for the group as its subsidiary, Cititel Hotel Management, is investing RM183mil to build  Jln Tun Razak development two more hotels in – at Gat Lebuh Noordin area. The two hotels are the 4-star St Giles Hotel and a budget There will be another project to be launched in 2012. hotel – Cititel Express. Currently called Lot15&16 at Jalan Tun Razak, the development comprises 166 units of serviced apartments The St Giles in Penang is the first of its kind in Malaysia in a 23-storey tower on a 0.8acre piece of land. It has a with the others in overseas markets such as New York, RM156mil GDV with a build-up to start at 1,100sf for each London and Manila. The hotel would have 500 rooms and unit. is 33-storey high and will have a unique facility of a helicopter pad at the rooftop. Meanwhile the Cititel Express  Park Manor in Sungai Buloh in Penang – with 275 rooms – will be the second Express ‘edition’ with the other hotel being in Kota Kinabalu. Park Manor is a gated and guarded development within IGB’s Sierramas development, comprising 41 units of 3-  Renaissance Hotel acquisition storey strata bungalows.

IGB announced recently that it is acquiring the remaining The houses will have built-ups ranging from 5,300 sq ft to stake (50% or 50 million shares) in Renaissance Hotel – 6,300 sq ft with a land area of about 2,400 sq ft. Each unit located in Jalan Sultan Ismail – for RM101.3mil from the will be sold at an average pricing of RM450psf or starting vendors, Stapleton Developments (SDL) and Chong Kim at about RM2mil each. Weng. To be launched in the middle of this year, we expect these IGB would also be settling SDL’s shareholder’s advance of units to be well taken up given it is within a matured RM176mil for a total cash consideration of township area. RM277.5mil.This transaction will see IGB fully owning Renaissance Hotel.  Recycling its assets overseas

The acquisition is based on 8.5x of the hotel’s EBITDA IGB is looking at establishing JV projects locally, for mixed- which is equivalent to a valuation of the hotel at RM710mil used developments akin to MidValley City but on a smaller net of bank borrowings and shareholders’ loan. We see scale within as well as in Penang and . this as a good deal as the group would be able to have The company is currently actively talking to landowners but complete control in operating the prime asset. nothing has been finalised yet.

However, the group is looking at aggressively venturing into property development overseas. We gather the group has submitted bids for several projects in the UK and

AmResearch Sdn Bhd 8 IGB Corporation 6 January 2012

CHART 1 : G RESIDENCE LOCATION

Source: Company / AmResearch

Taiwan. This will be done via JVs subject to successful tenders. Both ventures would involve mixed-use developments comprising residential and commercial properties. We note that the UK project would be in London and could have a GDV of GBP1.5bil/RM1bil.

Meanwhile the group plans to replicate a smaller version Mid Valley City in Taiwan/Taipei as part of the city’s MRT project. Although there was no guidance from the management on the development value, it has been cited in the press that the Taipei project could have a GDV of RM5bil to RM6bil.

CHART 2 : PARK MANOR LOCATION

Source: Company / AmResearch

AmResearch Sdn Bhd 9 IGB Corporation 6 January 2012

CHART 3 : MIDVALLEY CITY AND KL ECO CITY TO COMPLEMENT EACH OTHER

Source: Company / AmResearch

TABLE 9: SUPPLY OF MALLS WITHIN KLANG VALLEY Recently opened & future Malls in Klang Valley Name of Mall Location Category NLA (sf) Expected Completion Kuala Lumpur 1. 1 Cheras Mass 420,000 Completed 2. Pudu Mass 500,000 Completed 3. Kuala Lumpur Festival City Mass 450000 Completed 4. Publika @ Solaris Dutamas Hartamas Mass 335000 Completed 5. Suria KLCC Phase 2 (Lot C) KLCC Premium 140000 Completed 6. Nu Sentral KL Sentral Mass 650000 2012 7. Damansara City Mall Mass 188000 2013 8. Sunway Velocity Shopping Mall Cheras Mass 850000 2014 9. Boustead Retail Development Jln Cochrane Mass 1200000 2014 1. First Subang Subang Jaya Mass 140000 Completed 2. Space U8 Shah Alam Mass 619280 Completed 3. Setia City Mall Setia Alam Mass 700000 2012 4. Paradigm Kelana Jaya Mass 700000 2012 5. The Strand Mall Kota Damansara Mass 308800 2013 6. M Square Shopping Centre Puchong Perdana Mass 380000 2013 7. IOI City Mall Mass 1300000 2013 8. Empire City Mall Damansara Perdana Mass 1000000 2014 9. da:men USJ Mass 400000 2014 10. Petaling Jaya Mass 300000 2014 11. Av enue Street Mall Sungai Buloh Mass 370000 2014 Source: Various

AmResearch Sdn Bhd 10 IGB Corporation 6 January 2012

CHART 4 : PB BAND CHART CHART 5 : PE BAND CHART 2.0 37.0

1.6 31.6

+1s 1.2 ) 26.2 (x Avg ) (x +1s 0.8 -1s 20.8 Avg 0.4 15.4 -1s 0.0 J O J A J O J A J O u c a p u c a p u c -l -t n r -l -t n r -l t 10.0 0 0 1- 1- 1 1 1- 1- 1 1- J O J A J O J A J O 9 9 0 0 0 0 1 1 1 u c a p u c a p u l t n r l t n r l tc 0- 0- - - 1- 1- - 1- 1- 1- 9 9 01 01 0 0 1 1 1 1

TABLE 10: LATEST RETAIL MALL TRANSACTIONS IN KLANG VALLEY Consideration Year Buildings Location NLA (sq ft) RM'mil RMpsf Buyer Seller 2008 Citta 424,000 280 660.4 SEB Asset Mgmt Puncak Dana Part of Sg Wang Plaza Jln 510,418 595 1165.7 CapitaLand Ltd Landmarks Bhd 2009 Jln Sultan Ismail 256,811 401 1561.5 Starhill Global REIT Starhill REIT 2010 Jln Bukit Bintang 297,354 629 2115.3 Starhill Global REIT Starhill REIT Selayang Mall Selayang GFA: 861530 128 Amanahraya REIT Kumpulan Wang Bersama Sunw ay Py ramid Bdr Sunw ay 1685568 2132 1264.9 Sunw ay REIT Sunw ay Group Part of Sg Wang Plaza Jln Bukit Bintang 450470 724 1607.2 CMMT REIT Capitaland Ltd Mines Shopping Fair Seri Kembangan 719563 530 736.6 CMMT REIT Capitaland Ltd SACC Mall Shah Alam 185178 90 486.0 Amanahray a REIT PKNS 1 Mont Kiara Retail only : 225920 333 ARA Asia Dragon Fund Aseana Properties Ltd 1H2011 Putra Place Jalan Putra Retail only : 501000 514 Sunw ay REIT Public Auction

Source: Various

AmResearch Sdn Bhd 11 IGB Corporation 6 January 2012

TABLE 11: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec ) 2009 2010 2011F 2012F 2013F

Revenue 642.4 719.4 723.8 790.1 823.5 EBITDA 268.3 319.7 272.1 290.9 304.6 Depreciation (30.9) (12.8) (36.9) (42.3) (47.6) Operating income (EBIT) 237.5 306.9 235.2 248.6 257.0 Other income & associates 27.8 24.8 24.8 24.8 24.8 Net interest (56.2) (53.8) (49.6) (45.0) (46.0) Exceptional items 0.0 0.0 0.0 0.0 0.0 Pretax profit 221.5 277.9 229.1 243.0 249.4 Taxation (42.3) (78.3) (43.5) (46.2) (47.4) Minorities/pref dividends (20.2) (25.3) (13.7) (14.6) (15.0) Net profit 159.0 174.3 171.9 182.3 187.0 Core net profit 159.0 174.3 171.9 182.3 187.0

Balance Sheet (RMmil, YE 31 Dec) 2009 2010 2011F 2012F 2013F

Fixed assets 828.8 971.0 1,182.4 1,337.4 1,488.1 Intangible assets 0.0 0.0 0.0 0.0 0.0 Other long-term assets 2,506.6 2,595.8 2,420.6 2,546.7 2,571.4 Total non-current assets 3,335.3 3,566.9 3,603.0 3,884.1 4,059.5 Cash & equivalent 646.3 628.8 506.1 377.8 449.2 Stock 65.4 64.8 61.9 68.4 71.1 Trade debtors 129.7 89.4 168.6 184.0 191.8 Other current assets 287.1 358.3 454.6 564.3 496.8 Total current assets 1,128.4 1,141.2 1,191.1 1,194.5 1,208.9 Trade creditors 395.6 434.8 433.1 478.6 497.6 Short-term borrowings 83.5 252.2 122.8 122.8 122.8 Other current liabilities 39.8 49.7 49.7 49.7 49.7 Total current liabilities 519.0 736.7 605.6 651.1 670.1 Long-term borrowings 891.4 580.0 592.2 662.2 659.0 Other long-term liabilities 82.4 113.6 113.6 113.6 113.6 Total long-term liabilities 973.8 693.6 705.7 775.7 772.5 Shareholders’ funds 2,856.1 3,105.8 3,319.4 3,473.8 3,632.9 Minority interests 114.9 149.6 163.4 177.9 192.9 BV/share (RM) 1.9 2.1 2.2 2.3 2.4

Cash Flow (RMmil, YE 31 Dec) 2009 2010 2011F 2012F 2013F

Pretax profit 221.5 277.9 229.1 243.0 249.4 Depreciation 30.9 12.8 36.9 42.3 47.6 Net change in working capital (78.9) 0.0 (77.9) 23.6 8.4 Others 24.9 71.9 (68.3) (70.9) (72.1) Cash flow from operations 198.4 362.6 119.8 237.9 233.4 Capital expenditure (133.3) (188.3) (100.0) (50.0) (50.0) Net investments & sale of fixed assets 0.6 0.2 0.0 0.0 0.0 Others 42.3 5.6 200.0 (277.4) 0.0 Cash flow from investing (90.4) (182.5) 100.0 (327.4) (50.0) Debt raised/(repaid) (103.5) (142.1) (303.8) 0.0 (73.2) Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0 Dividends paid 0.0 (27.4) (27.9) (27.9) (27.9) Others (13.5) (10.8) (10.8) (10.8) (10.8) Cash flow from financing (117.0) (180.3) (342.5) (38.8) (112.0) Net cash flow (9.0) (0.2) (122.7) (128.2) 71.4 Net cash/(debt) b/f 656.1 646.3 628.8 506.1 377.8 Net cash/(debt) c/f 646.3 628.8 506.1 377.8 449.2

Key Ratios (YE 31 Dec) 2009 2010 2011F 2012F 2013F

Revenue growth (%) (6.7) 12.0 0.6 9.2 4.2 EBITDA growth (%) 77.6 19.1 (14.9) 6.9 4.7 Pretax margins (%) 34.5 38.6 31.7 30.8 30.3 Net profit margins (%) 24.7 24.2 23.7 23.1 22.7 Interest cover (x) 4.9 6.2 5.6 6.4 6.4 Effective tax rate (%) 19.1 28.2 19.0 19.0 19.0 Net dividend payout (%) 16.6 14.3 16.9 16.4 15.5 Debtors turnover (days) 73.7 45.4 85.0 85.0 85.0 Stock turnover (days) 37.1 32.9 31.2 31.6 31.5 Creditors turnover (days) 224.8 220.6 218.4 221.1 220.5

Source: Company, AmResearch estimates

AmResearch Sdn Bhd 12 IGB Corporation 6 January 2012

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