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

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IGB CORPORATION (IGB MK, IGB.KL) 6 January 2012 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 - Gurney Plaza 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 Implied capital value psf (RM) 2550.1 to the recent listing of Pavilion Retail REIT, as well as the 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.
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