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This article first appeared in The Edge Financial Daily, on October 22, 2015.

IGB_fd_221015_theedgemarkets

IGB Real Estate Investment Trust 
(Oct 21, RM1.31)
Downgrade to hold from buy with a lower target price (TP) of RM1.35 from RM1.40:
We are downgrading IGB Real Estate Investment Trust (IGB REIT) to hold, as upside potential is narrower after revising our TP for a higher risk-free rate and taking into account flattish financial year 2016 distribution per unit growth.

While we believe performance will be steady from its prime retail assets, lower consumer spending and payout ratios in the near term are risk factors.

IGB REIT owns Mid Valley Megamall and The Gardens Mall, located just outside Kuala Lumpur city centre. The adjoining malls are prime shopping hotspots, with consistently near-full occupancy.

Additionally, its average rental rates of RM10 to RM12 per sq ft (psf) per month are still lower than prime areas in Kuala Lumpur city centre that can exceed RM20 psf per month.

This will provide headroom for positive rental reversions. We expect continued positive reversions at Mid Valley and The Gardens despite dampened consumer sentiment.

Earnings growth will likely be steady as expiry of net lettable area (NLA) is spaced relatively evenly at 30% to 36% per year.

For inorganic growth, parent IGB Corp is developing the Mid Valley Southkey mall in Johor, with 1.5 million sq ft NLA in the first phase which is expected to be completed in 2018.

Upon maturity, this may be an injection opportunity for the REIT, as it has first right of refusal over this asset. — AllianceDBS Research, Oct 21

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