A second chance for IGB?

SHARE price has fallen 14% since recommendation downgrade in mid-October. 

Revalued asset of at least RM2.24 per share based on market valuation for Megamall alone, before incorporating the other components of Mid Valley and the potential of upcoming expansion. 

Good scope for special dividend following the sale of IJM for RM383mil; interim dividend declared last Friday already exceeded full-year dividend in 2002. 


Second chance? Looking back, we have done well in the timing of our call for IGB (RM1.35, stock code 1597), having downgraded the stock just a month ago.  

Since then, the share price has fallen 14% to its current level, way underperforming the KLCI which slipped 1% over the same period.  

For some reasons, IGB’s proposal to reverse take over Kris Components (RM2.62, stock code 6653) via the injection of Mid Valley Megamall (MVM) was not seen favourably by investors.  

On our part, we believe the market could have misunderstood the proposal somewhat, which brings us to revisit the stock.  

A closer look at the backdoor listing of MVM. Under the proposed reverse takeover IGB will essentially end up as the controlling shareholder of Kris, whose principal asset would be the very impressive MVM. The proposals would be cash neutral to positive for IGB, and more importantly, would help surface the value of MVM to reflect its success. After all, MVM boasts 2 million shoppers per month, 100% occupancy, and annual revenue of over RM100mil and on the rise. Based on independent valuation by Colliers, Jordan Lee and Jaafar, the 1.7 million-sq ft MVM together with 6,394 car park bays are worth a whooping RM1,480mil! As of end-2002, the audited net book value of MVM was only RM657mil. 

More to Mid Valley than just MVM. As for the negative market reaction to the deal, we suspect that investors may have sold down IGB in the belief that should it emerge as a holding company of Kris, and in turn MVM, there would be ‘nothing much’ left.  

In this respect, it is important to stress that IGB is only proposing to inject MVM into Kris, while the entire Mid Valley development covers much more. The portion which remains under IGB would include the existing 210,000 sq ft Menara IGB and the four-star Cititel hotel, as well as almost 50 acres for future development.  

The second phase of MVM will bring on an additional 500,000 sq ft of retail space, or about one-third of the size of the existing mall, while others in the pipeline include five office towers, another four-star hotel, service apartments and condominiums.  

In comparison, what is currently going into Kris is a relatively small portion. The negative investors' perception, as such, seemed rather misplaced. This is especially when IGB itself also undertakes other ongoing developments including upmarket projects such as Sierramas and Federal Hill, the more mass market Seri Maya as well as the upcoming joint-venture on more than 100 acres in Wangsa Maju with Landmarks (RM0.61, stock code 1643). 

Potential positive implications? What’s more, one should also not forget that IGB still retains its control of MVM via Kris, which it will own as much as 86% before a Mandatory General Offer.  

This means that it needs to place out or sell/distribute to shareholders at least 11% to maintain Kris’ listing status. This could either have positive cashflow implications on IGB, or would be good news for shareholders in the case of a potential distribution.  

Only trading at 0.6x NTA. Before that, the revaluation of MVM alone would add 64 sen per share to IGB’s net tangible asset (NTA), raising proforma NTA from RM1.60 per share at end-Sep 2003 to RM2.24 per share. This means that at the current price, IGB is trading at just 0.6x proforma NTA, even before factoring in current market value and future potential of the non-MVM components of Mid Valley.  

Upcoming special dividend? Besides its asset attraction, there is a dividend angle from the disposal of IJM (RM4.90, stock code 3336) which netted RM383M, or 33.5 sen per IGB share. With this handsome ‘windfall’, we are confident that IGB will reward shareholders with a special dividend when it announces its final results in February 2004. As an indication of a more generous dividend policy going forward, IGB has announced an interim net dividend of 1.8 sen per share with its third-quarter results which was released last Friday. While net yield of 1.3% is not exactly exciting, it is significant as it is IGB’s first interim dividend since 2001, and is higher than the full-year dividend paid last year. If we assume that IGB directs just 10% of the disposal proceeds for dividend purposes in the final results, shareholders can already look forward to almost 4% net yield in 2003.  

We would also keep tab of IGB’s 24.6% stake in Negara Properties (RM4.08, stock code 2437), the subject of a voluntary General Offer (GO) from Island & Peninsular (I&P) (RM4.22, stock code 1627). We suspect that IGB would likely accept the GO, which will see it emerging with just over 2% stake in I&P. This may be another potential source of cash flows (estimated at RM40M-RM60M), being a liquid investment and a non-meaningful stake.  

Another window for entry. In summary, we feel that IGB’s share price has run contrary to recent developments which are helping to surface values amidst an improving balance sheet. Over time and as investors gain better understanding of the MVM/Kris proposal, we believe a re-rating is on the cards from its current pricing of 0.6x underlying asset value (only revaluing MVM).  

Meanwhile, PER is not expensive at about 15x 2003 earnings, excluding exceptional items. There is also the expected special dividend not far down the road. In all, it is timely to upgrade IGB to a BUY to capitalize on its under-performance. 

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