AmResearch: Downgrade IGB to ‘hold’

IGB Corp: Lack of new launches a disappointment

We have downgraded IGB Corp Bhd (IGB) from BUY to HOLD and cut our fair value to RM2.20/share from RM2.80/share based on a 45% (previously 30%) discount to our NAV estimate at RM4.00/share. Historically, IGB has traded at 50% discount to its NAV.

Following our company visit, we understand that there will only be two residential launches this year – with an estimated GDV of RM140 million – from our earlier expectation of around RM400 million to RM500 million in new launches. Final phase development at MidValley City remains status quo.

Just two launches this year

Seri Ampang Hilir to kick-off things

IGB will be launching two projects this year, worth an estimated RM140 million to RM150 million in development value. Its first project, Seri Ampang Hilir –  to be launched mid-year – will be a 10-storey block of luxurious apartments. We understand pricing will start at RM850psf with average built-up at 2,200 sq ft to 4,500 sq ft for the units.

We foresee strong demand for this development given: (1) Its sexy location; (2) Lack of new launches within the area; and (3) Scarcity of land in the vicinity.

Situated in the upmarket area of Ampang Hilir, the site is situated just next to Seri Hening – a luxury low-rise apartment owned by Great Eastern Insurance.

We believe the ultimate attraction of this project is its close proximity to KLCC – a five to 10- minute drive. An added plus would be its easy accessibility to major highways such as Middle Ring Road 2, Ampang Kuala Lumpur Elevated Highway (AKLEH) and also the recently opened Duta-Ulu Kelang Expressway (DUKE).

International schools within the area are International School of Kuala Lumpur (ISKL), Sayfol International and Fair View.

Pandan mixed-commercial

IGB’s second development for this year would be a mixed commercial project within the Pandan area. Apart from a medium-range apartment – to be priced at RM500psf – there will a four-storey retail centre with an F&B element. Development is to be launched towards year-end with an estimated GDV of RM90mil.

We expect a good take-up for the project given its location and lack of quality mixed-developments in the area – a predominantly a residential area. Site is located next to RainTree Club – closer to Ampang Hilir than the Pandan area. Also, it is not too far from Seri Ampang Hilir – a two to three-minute drive.

6 Stonor launch delayed again

Another high-end condominium that IGB has in the pipeline is 6 Stonor - located in a prime area near KLCC – will not be developed this year. Initially, the group was in talks to sell this building en-bloc in 2008 but this did not materialise due to the global financial crisis.

IGB has been granted approval for this development, a 30-storey condominium block comprising 110 units. Built-up for a standard unit is 2,800 sq ft with penthouse units to start at 8,000 sq ft – at an average pricing of RM1,000psf.

With an estimated GDV of RM300mil, this would have boosted IGB’s FY2010F presales to RM450 mil.

Other residential developments for this year

There is also a possibility of bringing forward one of IGB’s planned projects for FY2011F to FY2010F if possible. It might launch a sequel to Garden Manor in FY2010F. Development would be similar with GDV in the range of RM40 milllon-RM45 milllion. Recall that IGB managed to sell all 41 units of semi-detached units at Garden Manor in December within a day - at an average price of RM1.4mil per unit. Garden Manor is located in Sungai Buloh, close to its SierraMas flagship project.

Some landbanking to boost NAV

There is another plan for development of high-end apartments near Yow Chuan Plaza – within the KLCC area. IGB has received a development order although there were some issues of compulsory acquisition of the said land by the Government.

Approval issues for final phase for MidValley

The final phase of MidValley would most likely be made up of two office towers similar to Gardens North and South Tower. We understand saleable area would be about 600,000 sq ft where estimated GDV is RM1 billion.

Recall the management had previously planned for medium range high-rise apartments with saleable area of 800,000 sq ft (estimated GDV: RM400 million-RM500 million) -- for its last parcel of land - measuring 2.3acres - in MidValley City.

Management indicates that change of plans is mainly because it sees stronger demand for office space in the area – following an improvement in occupancy at Gardens’ North and South Tower. This would also provide stronger recurring income for its property investments division.

We understand that IGB is buying a remaining 50% of a parcel of land measuring 30 acres in Setiawangsa – former TV3 academy site – at around RM50 million. There are no definite plans for this project at this juncture although we believe it could be a mixed development project comprising shop offices and residential units. Furthermore in early 2009, the group had purchased an 8-acre piece of land in Kerinchi – to be developed as medium range apartments.

While this is true, we think that the switch to an office development might have been due the regulators concerns about density issues. This was an evident lack of parking space within the vicinity. We believe this might be the prime reason that a development order for this project was not forthcoming.

We gather that development of the two corporate towers might not start until FY2012F given the abovementioned problem.

Investment properties earnings driver

IGB’s property investments will continue to driver earnings with new properties stabilising. Occupancy at Gardens office towers is expected to strengthen to 90%-100% by year-end from 50%-70% currently. We are expecting a solid rental reversal of circa 5% as well at MidValley MegaMall in tandem with stronger consumer sentiment.

MidValley MegaMall

MidValley MegaMall recorded 5% turnover growth despite a weak economy last year. The reason being that MegaMall is not considered a neighbourhood mall but rather a regional shopping mall – offering retail goods that are demand elastic.

Visits to these types of malls are less frequent and households tend to shop for longer hours compared to a neighbourhood mall.

MegaMall (NLA of 1.7 million sq ft) continues to enjoy 100% occupancy rate with average rental rate firm at RM9.80psf. We believe it will continue to enjoy strong patronage given the rising maturity of the area and its strategic location – smack in the middle between Petaling Jaya and the Kuala Lumpur city centre.

Visitorship would be further aided by the completion of Duta Ulu Kelang Expressway (DUKE), providing easy accessibility to households from Ampang and Gombak.

Gardens Mall

We understand occupancy rate in this high-end mall has improved over the past year to 97% (from 91% since its inception). Decent rental revisions were seen last year, with current average rental rate at RM9.60psf from RM9psf in 2008.

Office towers to be filled up

Both Gardens North and South Tower have seen stronger occupancy at 89% and 52% from 74% and 27% in FY2008 respectively. Average rates remain stable at RM5psf- RM6psf with some tenants paying as high as RM6.50psf – in-line with comparable buildings in Golden Triangle.

Management has guided for full occupancy for both towers by end-FY2010F.

For sale

After Renaissance Hotel and MiCasa Serviced Apartments, Ampwalk – located in Jalan Ampang – is now added to the “for sale” list as IGB looks to crystallise its investments.

We understand that the group has put up a price of RM85mil or RM550-RM600psf. This building is 50%-owned by IGB with 50% owned by Wearne Brothers.

Renaissance Hotel, meanwhile, has long been up for sale, but from what we understand the management’s contract will not expire until 2016. We think this might have been seen a “repellent” to interested parties. We understand that buying out the hotel’s management contract involves quite a substantial amount, ranging from RM28 million to RM30 million.

Earnings estimates

Our earnings estimates for FY2010F-FY12F have been slashed by 6%-11% to RM165 million to RM197 million due to the lower than expected launches. Our earnings estimates are mostly driven by income from property investments with MidValley MegaMall as key contributor – accounting for 53% of investment properties’ operating profit. In terms of dividend – despite the possible increase in dividends – we maintain our assumption of 17% payout which translates to around 3 sen Gross DPS.

Deep discount but...

Even though current valuation of 52% discount to NAV appears attractive, a slowdown in new residential presales plus likelihood of no restructuring of assets means IGB might lag other leading property stocks such as IJM Land and S P Setia.

SP Setia, for instance, recently guided for an increase in new sales to RM2bil from RM1.65 billion on back of very strong sales in 1QFY2010 of RM608mil (versus a meagre RM102million in 1QFY2009).