IGB REIT’s Southkey seen to replicate Mid Valley’s success

IGB Real Estate Investment Trust (Sept 27, RM1.70)

Maintain hold with an unchanged target price of RM1.68: We remain upbeat about IGB Real Estate Investment Trust’s (REIT) potential asset injection, the Southkey Megamall, which is currently under construction and expected to officially open by end-2018 (with soft launch on Aug 8, 2018).

We view Southkey as another Mid Valley Megamall in the making, owing to its potential to plug in the retail demand gap in the southern region and serve the population from Melaka, Johor, and Singapore. We believe that the mall will replicate the success of Mid Valley and introduce a whole new modern retail concept.

In our view, Southkey is likely another Mid Valley in the making, based on the initial assumptions: i) a potential gross rental revenue of RM356 million to RM405 million per annum (monthly rental of RM22 per square foot [psf] to RM25 psf versus prime market rate of RM27 psf); ii) a 70% net property income margin; and iii) acquisition price of between RM3.56 billion and RM4.05 billion, funded by 50:50 bank borrowings to new equity.

We expect IGB REIT’s earnings to remain resilient on: i) stable occupancy rate (about 100%); (ii) an experienced management team; and (iii) more efficient cost management. We think its 2017-2019 distribution per unit (DPU) yields remain attractive at 5.4%-5.8% vis-à-vis the peer average of 5.4%-5.5%.

The likelihood of sustained renewals in 2017 (with 40% of Mid Valley’s and 42% of The Gardens Mall’s net lettable area due for renewals) and positive rental reversions continue to justify the higher DPU payouts in FY17-FY19, in our view. — Affin Hwang Capital, Sept 27

This article first appeared in The Edge Financial Daily, on Sept 28, 2017.

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