gsg_stock discussion

Stockwatch- IGB Corp (Malaysia) RM$1.41 JP Morgan initiate coverage 28 Oct 2006

IGB Corporation
Attractive piece of real estate

• Initiate with OW, PT of M$1.90: We initiate on IGB with Overweight and a Dec-07 target of M$1.90. Its earnings profile and growth is set to improve due to the M$1.3bn new commercial project launch ‘The Gardens’ by Sept-2007. We expect recurring property investment income and hotel earnings to rise from 65% to 76% of profit in FY06-08, and EPS growth to rise from 8% in FY06 to a CAGR of 18% in FY07-08 vs the sector’s 8%.

• Share price drivers: Commercial property trends continue to improve with rising activity levels fueled by the set up of REITS, expectation of a stronger Ringgit, and Malaysia’s attractive capital values (the cheapest in the region) and yields (8% for prime office space vs Singapore’s 4%). IGB is well positioned given its prime, expanding commercial asset base. Higher dividends and/or a shift in focus to capital management are also possible from FY08 as ‘The Gardens’ nears completion and with rising free cash flows.

• PT and risks: IGB trades at a 50% discount to RNAV of M$2.71. The discount should narrow as assets generate stronger earnings from FY07. Our PT of M$1.90 is at a 30% discount to RNAV and implies an FY07E P/E of 18x versus the Malaysian average of 9x, and regional average of 29x for property investors. Risks: earnings disappointments from residential segment, and oversupply of commercial property (though unlikely for prime assets).

Commercial property industry trends improving
The residential property segment is moderating after the strong growth since 2004 and due to oversupply in certain segments. However, activities in the commercial segment have picked up over the last two years with commercial transactions in the Klang Valley rising from 30% of residential transactions in 2002 to 45% in 2005.

Capital values for commercial property have also been on the rise. Our basket of office property transactions in the Klang Valley shows an average rise in value of 17% Y/Y in 2006 to M$479/sqft as well as higher value for recent hotel transactions (see Table 3). In Kuala Lumpur, hotel occupancy rates have also improved from 63% in 2003 to 70% in 1Q06, while the average room rate for top tier hotels rose by 12% Y/Y in 1H06. Prospects for hotels, especially in prime locations, remain good given the rising tourist arrivals (projected to rise 7% Y/Y in 2006), the ‘2007 Visit Malaysia Year’ drive and the continued healthy economic growth.

Malaysia’s capital value/yields remain attractive regionally (see Table 4), with average Klang Valley net rental yields at 6-8% for office space (8% for prime space) and at 7-10% for retail complex. Considering this and the increasing interest/demand among foreign property investors as well as from REITS, there is potential upward pressure in capital values, which augurs well for IGB given its prime commercial assets. Every 1% rise in commercial asset values would increase our RNAV estimate by 0.8%.

Prime commercial assets—Key prized asset, MVC
IGB owns combined office space of 0.95 million sq ft in KL with occupancy rates of 76-100%. The company also has interest in 10 hotels—five in KL, one in Pangkor island resort, and four overseas—with occupancy rates of 60-88%. Its key prized commercial asset however is its MVC retail mall (Phase 1) with a net lettable space of 1.7 million sq ft and operating at a 100% occupancy rate, situated in a prime location in Klang Valley between the business area of Kuala Lumpur and Petaling Jaya residential area. The retail mall caters largely to middle-income consumers and commands a patronage of about 30 million visitors annually, versus 40 million for the Suria KLCC Mall in the heart of KL.

IGB is developing ‘The Gardens’ development, which will entail a high-end retail mall (MVC-Phase 2) with a net lettable area of 0.8 million sqft. The mall will come onstream by September 2007, followed by two new office towers and two hotels in the same area by end-2008 and end-2009, respectively. The project will raise IGB’s total net lettable area of retail and office space by 83% to 4.85 million sq ft by end-2008, versus KLCC’s current 5.6 million sq ft. Rentals at MVC- Phase 2 are being negotiated at a 20-25% premium to MVC—Phase 1's M$8/sqft. To date, the group has leased out 50% of space for MVC—Phase 2 (anchor tenants: Isetan and Robinsons), and is on track to achieve 70% by September 2007. The total development cost stands at M$1.3 billion, which includes M$150 million for infrastructure upgrades and additional parking bays. Discussions are also being held with the authorities for connections with the Monorail and Putra LRT via ‘The Gardens’.

Property development
IGB’s sales continued to rise amid the softer residential market, up 94% Q/Q in 2Q06, aided by the group’s niche strategy and branding in the mid-high end segments in Klang Valley’s prime areas. The group has estimated unbilled sales of M$260 million as of end-1H06 (0.9x of historical property revenue), and cumulative planned launches in the Klang Valley total about M$700-750 million over FY06-07, at M$0.3-2.5 million per unit. We believe this will help sustain earnings up to FY08. Beyond this, IGB can tap onto its remaining land bank of 240 acres in the Klang Valley for at least the next three to four years.

posted by gsg @ 11:27 AM