IGB shows good growth

More positive. We came away from a recent meeting with IGB (RM0.79) feeling even more positive, prompting us to upgrade 2003 forecast by slightly more than 5%. Indeed, the property development, hotel and retail divisions are all going well. 

Before that, IGB had reported a commendable set of results, after the merger of its property-related businesses with Tan & Tan in mid-2002. Even on enlarged share capital post-merger, 2002 earnings per share (EPS) still grew 39% from 2001. The good showing met our expectations (after several earnings upgrades), and was driven by improvement across-the-board. Most notably, the Mid Valley Megamall has turned profitable at the pre-tax level. 

As for October-December 2002, the sequential profit decline reflects timing of property profit recognition, which should not be a concern. At the same time, we note that IGB went from an unusually low tax rate in July-September to an unexceptionally high level in October-December 2002.  

As the overall tax rate for the full year still stayed close to the statutory rate of 28%, the sharp fluctuation in the two latest quarters would mostly likely be offsetting adjustments. 

Buoyant property sales. To gauge the way forward, let’s start with the property division. IGB sold more than RM400mil worth of properties last year, achieving 70%-90% take-up rates across four projects i.e. Federal Hill, Seri Maya, Sierramas West and Kundang Jaya.  

The biggest is Federal Hill, where only the luxury condominiums remain unsold. Overall pricing was way above expectations, raising the estimated GDV (gross development value) for Federal Hill to about RM300mil, a good 50% higher than our original projection. As sales were mostly secured in the second half of 2002, we see meaningful contributions coming in 2003 and 2004. 

Also worth mentioning is the better-than-expected take-up in Kundang Jaya, a relatively small development.  

In view of strong response, Kundang Jaya not only brought forward the launch of double-storey link houses, but at prices about 10% higher. To date, more than 300 units have been sold. 

Reaping returns in 2003. In 2003, we see a reduced pace of launches as IGB works towards delivering more than RM400mil of locked-in sales. Launches in the pipeline include another phase of condominiums in Seri Maya (details not finalised), as well as affordable housing in Taman Ika Matahari, Negri Sembilan. 

Investment properties doing equally well. IGB’s major investment properties also outshine its peers, as evident in the long waiting list of tenants for Mid Valley Megamall. In fact, the success of Megamall has drawn tenants to Menara IGB, where occupancy has risen from 80% last year to 100%, while a new rental benchmark of RM3.50 per sq ft has recently been set. 

It is hence a happy vicious circle as the increase in office crowd enhances Megamall’s patronage and the attraction of the entire Mid Valley development, which in turn strengthens IGB’s bargaining power in terms of future rental renewal and sales.  

As it is, the average rental at Megamall has already increased 10% in its first renewal completed in late-2002, the benefit of which will filter through this year.  

Megamall also attracts shoppers from other states who lodge at the Cititel Hotel, which enjoys full occupancy on weekends (80%-90% on weekdays). 

Expansion on the way for Megamall ?Riding on the success of Megamall, IGB will soon embark on the second phase of Mid Valley at a cost of RM600mil.  

This comprises an adjacent shopping mall, which will add about 30% space to the existing, as well as 450 units of condominium, hotel and office blocks.  

IGB is expected to start work on the retail, condominium and office space this year.  

The new mall will have a higher-end focus to complement the existing mall, an is targeted for completion in 2005. 

The new office block, similar in size to Menara IGB, will be on top of the current shopping complex. Meanwhile, the RM135mil condominium project is still pending the issue of land title.  

Any threat from Berjaya Times Square? While we will certainly keep a close eye on Berjaya Times Square (BTS), we believe Megamall has a strong headstart, location and population catchment, as well as the size and tenant mix to stand its own against this upcoming competitor. As we see it, BTS also seems to be positioned more towards the entertainment concept, and may not be a direct competitor as such. 

Hotel steady. On the whole, IGB’s hotel division did relatively well with average occupancy rate of 70-80%. Plans are underway for the construction of budget hotels (like Cititel) in Vietnam and the Philippines. All its hotels are profitable although the outlook is somewhat less exciting as war concerns tend to deter travellers. 

Further delay in IJM sale? Meanwhile, the proposed disposal of its 20% stake in IJM (RM4.72) and 15.9 million IJM-WA (RM1.80) to Tronoh Mines (RM1.90) for RM382.5mil cash, is likely to be deferred beyond the extended March deadline. This was caused by restructuring delays at Tronoh Mines and is not a concern. 

Special dividend? As current net debt is relatively comfortable at 38% of shareholders’ funds, we do not discount the possibility that IGB may partly distribute proceeds from the IJM sale as higher dividends. As for 2002, IGB maintained full-year net dividend at 1.1 sen per share despite a near doubling in share capital after a 1-for-2 bonus and the issue of new shares pursuant to the property merger. The 2002 dividend would yield 1.4% at the current price, and will go ex on June 26, to be paid on July 15. 

Compelling investment still. In all, IGB remains a good stock to BUY, backed by strong earnings, quality assets and management. After the 5% earnings upgrade, IGB now trades at 9.5 times 2003 price-earnings ratio for 15% net profit growth. A net tangible asset of RM1.70 per share at end December 2002 already more than doubles the current share price, while revalued asset even more so if one incorporates the current value of Megamall. Maintain BUY.  

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