IGBREIT — The GEM to shine in 2021
Business Model
The business model of IGBREIT is very straightforward and simple to understand, it owns and manage 2 Major Retail Malls in Malaysia: Mid Valley Megamall (MVM) and The Gardens Mall (TGM). The 2 megamalls are well known among Malaysians and probably most of Klang Valley folks would already visit the malls at least once or many times before. As a REIT, it is professionally managed by a Manager (IGB REIT Management Sdn Bhd) and under the Trustee Structure ( MTrustee Berhad). According to the Annual Report 2019, the major sponsor, IGB Berhad is the major unitholder with a 53.1% shareholding and the rest 46.9% are owned by the other investors.
The business model of IGBREIT is not exciting as the other industrial REITs in the market but it has an unique characteristic which is resilient in the most economy conditions whether it is bullish or downturn market. Of course, the Covid Pandemic is an exception which causes an impact the business of the company as the malls are forced to shut down during the Movement Control Order (MCO) and human footfall has dropped drastically during the period. Nevertheless, these 2 megamalls are still the favourite shopping spots for many Malaysians who stay around Klang Valley to shop almost anything that you can think of from luxurious shopping items to basic food necessities.
From overall strategic planning perspective, the sponsor, IGB Berhad has a very strong management team and long term vision to build the entire Midvalley area. The megamalls are complimented by the surrounding hotels and offices around the area, bringing in consistent traffic flows 7 days a week to the megamalls. During non-covid situation, I think most of us find it hard to even find a parking space in the mall parking lots, especially on weekends. Considering its strategic and central location, it is also one of the nearest larger megamalls to the wealthy resident population and expat population around the Bangsar Area and KL Area. For the last few years, a lot of high end condo properties are developed around the KL Eco City area, creating even more human traffic to the 2 megamalls. With a bigger population with stronger spending power surrounding the malls, it is another competitive advantage or moat that IGBREIT has.
According to the Prime Minister’s office statement, the Covid Vaccine is expected to arrive in Malaysia starting March 2021 via 3 phases to the majority of the Malaysia population. If everything goes according to plan, we could be expecting that the most Malaysians to get vaccinated around Q2 2021 and get back to office perhaps by Q3 2021. That being said, the office lots around the megamalls will be again filled with “Humans”, creating the healthy traffic flow back to the malls again. :)
Most major business brands are aware that Covid Pandemic is likely to end in 2021, and many of them have tried all kind of ways to be part of the tenants in the megamalls and you will notice that most of the shops are taken within the 2 malls. During the pandemic period, IGBREIT Management has taken the golden opportunity to renovate and restructure the malls to create more rental spaces within the malls. This creates more confidence in investing in the company as the management team has not wasted the covid period and actually created more value within the malls.
Financial Performance
The financial performance of the company are so exciting like tech stocks but the company has shown consistent and uptrend income growth since 2015 . Earning per unit (EPU) has also grown on a year-on-year basis from 7.33 to 8.91 as well as Distribution per unit (DPU) from 8.19 to 9.16.
For most investor, dividend yield is the most important factor for investing in REIT. In FY2020, the company has only distributed 6.75sen dividend due to Covid Pandemic and it is actually a pretty stable dividend yield of about 4% (which is definitely higher if you compared to average 2% FD rate now).
On 25 January 2021, the company declared their first dividend of 2.08sen. If we assume that the company to maintain the similar performance for the rest of the year and distribute the same dividend for the remaining quarters, that would add up to 8.32sen distribution in 2021; which is equivalent to about 5% dividend yield (based on current trading price of RM1.65). Based on my personal opinion, I believe that the company would perform better in the 2H2021 with the major population coming back with stronger accumulated spending power and dividend distribution should range around 8.50sen to 8.75sen on a slightly conservative estimation.
Conclusion Note
Personally I think REITS deserve to be part of your investment portfolio and IGBREIT is one of the better choices out there. As vaccine could reach most Malaysia population and life goes back to normal soon in Q3 2021, IGBREIT is likely to be one of the recovery theme beneficiaries from the explosive spending. And of course, it is currently quite undervalued at the current trading price of RM1.65 and I forecast that it could go back to the trading price range of RM1.90 to RM2.00 probably by Q2 or Q3 2021.
