IGB Corp (AmResearch) maintain hold; fair value RM2.33

Investment Highlights

• We are maintaining our HOLD for IGB Corporation Bhd with our fair value revised to RM2.33/share. Our fair value is arrived at after applying a 45% discount to our revised NAV estimate of RM4.24/share. Our NAV is revised as we rolled over our valuation to FY11F while also including new development projects.

• IGB reported earnings of RM53mil for 4QFY10, bringing its FY10 earnings to RM174mil (+12% YoY) which is largely within our and consensus’ expectations.

• Property investment unit remains as the main contributor to earnings with EBIT up by 37% YoY to RM235mil but there were stronger margins from the property development division – 56% versus 34% in FY09 – contributed by Hampshire Residences and Garden Manor.

• As widely expected, the group announced that it will be injecting The Gardens Mall into its 75%-owned subsidiary, KrisAssets. Both entities entered into Heads of Agreement (HoA) for the proposed disposal of 100,000 shares of Mid Valley City Gardens Sdn Bhd to KrisAssets for a cash consideration to be determined later.

• We estimate Gardens Mall is valued at close to RM1bil; this is based on a cap rate of 6.5%. The acquisition would most likely be funded by cash with outstanding warrants of 106.3 million (at a strike price of RM2.50); there will be additional cash of RM266mil – assuming full conversion.

• This had always been the plan although timing was always an issue – management wanted the mall to stabilise before crystallising the value of the asset. The Gardens mall is now operating at almost full occupancy with average rate of RM8.50-RM9.00.

• Furthermore, KrisAssets had recently executed the subscription agreement for the issuance of RM300mil convertible secured bonds, which would result in about RM500mil in cash in hand.

• Although the divestment of Gardens would only result in marginal profit of circa RM0.26/share, we view the exercise positively given that the unlocking of the Gardens Mall would provide stronger ammunition for landbanking for IGB. We estimate the group to be in net cash position post exercise.

• Elsewhere, IGB remains rather quiet in the property development side. The most recently launched project is Seri Ampang Hilir (GDV:RM90mil) with a take-up about 90%. The group has four to five projects – with combined GDV of about RM2bil – in the pipeline for the next two years.

MAINTAIN HOLD

We are maintaining our HOLD for IGB Corporation Bhd (IGB) with the fair value revised to RM2.33/share. Our fair value is arrived at after applying a 45% discount to our revised NAV estimate of RM4.24/share. Our NAV is revised as we rolled over our valuation to FY11F while also including new development projects.

Earnings largely within expectation

IGB reported earnings of RM53mil for 4QFY10, bringing its FY10 earnings to RM174mil which is largely within our and consensus’ expectations.

Property investment unit remains as the main contributor to earnings with EBIT up by 37% YoY to RM235mil but there were stronger margins from property development division – 56% versus 34% in FY09 – contributed by Hampshire Residences and partly Garden Manor.

INJECTING GARDENS MALL INTO KRISSASSETS

As widely expected, the group announced that it will be injecting The Gardens Mall into its 75%-owned subsidiary, KrisAssets.

Both entities entered into Heads of Agreement (HoA) for the proposed disposal of 100,000 shares of Mid Valley City Gardens Sdn Bhd to KrisAssets for a cash consideration to be determined later.

The HoA would be valid for up to 60 days while both parties conduct a due diligence for the completion of the proposed disposal of the mall.

This had always been the plan although timing was always an issue – management wanted the mall to stabilise before crystallising the value of the asset. The Gardens mall is now operating at almost full occupancy. Furthermore, KrisAssets had recently executed the subscription agreement for the issuance of RM300mil convertible secured bonds, which would result in about RM500mil in cash in hand.

We estimate Gardens Mall is valued at close to RM1bil; this is based on a cap rate of 6.5%. The acquisition would most likely be funded by cash with outstanding warrants of 106.3 million (at strike price of RM2.50); there will be additional cash of RM266mil – assuming full conversion.

Positive move

We view the exercise positively given that the unlocking of the Gardens Mall would provide stronger ammunition for landbanking for IGB. We estimate the group to be in net cash position post exercise.

But REIT may not take off

However the divestment of other assets may take some time, as KrisAssets would be faced with funding issues to acquire the remaining of the Midvalley City’s assets such as Midvalley and Gardens office towers and hotels of an estimated combined value of RM2bil-RM3bil. Thus we think the establishment of a REIT may not materialise.

PROPERTY DEVELOPMENT

IGB remains rather quiet in the property development side. The most recently launched project is Seri Ampang Hilir (GDV:RM90mil) with take up about 90%.

The group has four to five projects – with a combined GDV of about RM2bil – in the pipeline for the next two years. These include Desa Pandan, Melawati (Villas), Jln Tun Razak (Apartments), Sierramas (Villas), Stonor (Apartments).

We understand the next in-line to be launched is a mixed residential and commercial project in Desa Pandan – near to Rain Tree Club – with a GDV of RM282mil. This is expected to be launched by April 2011.