Saturday, March 8, 2014

Analysis of Malaysia-based IGB Real Estate Investment Trust

Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!


Before I begin my analysis of IGB Real Estate Investment Trust (REIT), there’s something I would like to get off my chest. I fucking hate it when people go gaga over a successful person because he/she is perceived as humble. While I don’t believe in being arrogant, I think it’s even worse to act humble. It’s moral to be proud of the fact that you can do something well. To be humble is to put yourself down and sate that there’s no difference between you and any mediocrity who simply goes through the motions of life. Someone who is truly humble doesn’t value himself, and that is truly immoral. But I guess that most people are mediocre, and a lot of them feel better about themselves if a successful person acts as if he’s just like them. By the way, I don’t think you need to be a billionaire and have a 10-inch dick to be successful. You’re successful as long as you’re doing something you love to the best of your ability; it doesn’t have to be your job, it can be a passion that you pursue on the side. Although I think you should try to find work that you enjoy as you will spend a significant amount of your life at your job.  Anyway, the annual report of IGB REIT came out recently and I decided to analyse the REIT to see if it has the potential to be a good cash cow. IGB REIT’s portfolio consists of two high quality properties: Mid Valley Megamall & The Gardens Mall which are located in Kuala Lumpur, the capital city of Malaysia. IGB REIT trades on the Bursa Malaysia. IGB REIT closed at Ringgit Malaysia (RM) 1.17 or approximately USD 0.36 on Friday.

The main risks to IGB REIT’s profits in the near future are potentially significant increases in property assessment taxes and electricity tariff. In 2013, 2.45% of IGB REIT’s gross revenue went towards covering quit rent & assessment expenses.  To put things into perspective, IGB REIT had a net profit margin of 48.05% in 2013. I don’t know how the assessment value of IGB REIT’s properties will be calculated (if anyone does, please feel free to share) so I can’t estimate the increase in assessment taxes. But according to this article on The Edge, various reports say that the assessment value of properties in Kuala Lumpur could be increased by up to 100%-300%. So, if the increase in assessment values is at the high end, IGB REIT’s profits could potentially take quite a significant hit. Maybe IGB REIT might be able to pass on some of the costs to its tenants, but I don’t know how much of the costs it can pass on.

Note: My calculation of the net profit margin excludes changes in fair value on investment properties.

According to this article in The Star, commercial consumers (which I assume IGB REIT falls under) will experience an average increase of 16.85% in electricity tariff. In 2013, 11.03% of IGB REIT’s gross revenue went towards covering utilities expenses. However, IGB REIT might be able to pass on some of the increase in electricity tariff to its tenants. IGB REIT managed to recover (I assume from its tenants) 48.13% of its utilities expenses in 2013. I don’t think the increase in electricity tariff will significantly affect IGB REIT’s profitability.

Mid Valley Megamall and The Gardens Mall are two of the most popular malls in Malaysia as evidenced by their relatively high annual revenue per square foot (psf) of net lettable area. The following tables present the annual revenue psf of net lettable area for IGB REIT’s properties and other good shopping malls in Malaysia:

Annual revenue psf of net lettable area for IGB REIT’s properties (in Ringgit Malaysia)

Mid Valley
171.49
The Gardens
158.79

Annual revenue psf of net lettable area for other popular malls in Malaysia (in Ringgit Malaysia)

Sunway Pyramid
139.58
Pavillion
277.60
Gurney Plaza
137.03
Sungei Wang Plaza
161.02

Other than Sunway Pyramid, all the other properties’ annual revenue psf of net lettable area is calculated using gross revenue data for the year ended 31 December, 2013.  Sunway Pyramid’s annual revenue psf of net lettable area is calculated using data from Sunway REIT’s 2013 annual report (the REIT’s financial year ends on June 30).         


Both Mid Valley and The Gardens have high occupancy rates of 99.9% and 98.8% respectively. In the 4th quarter of 2013, IGB REIT reported a year-on-year increase in gross revenue of 11.01%. The high occupancy rates and pretty good revenue growth could indicate that there’s healthy demand for space in IGB REIT’s properties.  Both Mid Valley and The Gardens are 99 years leasehold properties expiring on 6 June 2103.


Based on the number of units in circulation as at 31 December, 2013 and profits for 2013 (excluding changes in fair value on investment properties), IGB REIT had earnings per unit of RM 0.06. This will give IGB REIT a Price/Earnings ratio of 19.35 or an earnings yield of 5.16%. While IGB REIT owns really good properties, I personally would wait to see how the increases in electricity tariff and assessment taxes would impact IGB REIT’s profitability. But even if those increases have a small impact on profitability, I think that IGB REIT is a bit overvalued if it doesn’t demonstrate the ability to keep growing revenue and profits at a healthy pace. Thank you for reading. Take care and stay rational.

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