Is IGBB an investment opportunity?
Value Investing Case Study 54-1: A fundamental analysis of IGBB to see whether it is a value trap or an investment opportunity.
I bought IGB Berhad (IGBB or the Group) in 2018 as a value stock. At that juncture, the stock was trading at about RM 3.00 per share compared to its NTA of RM 4.26 per share.
Following some share in specie distribution and bonus issue my average purchased cost was reduced to RM 1.95 per share. There was some capital gain compared to the market price of IGBB (30 May 2024) of RM 2.48 per share.
IGBB was an unusual Bursa Malaysia property company in that property development was a small component of the Group’s activities. The bulk of its revenue came from recurring income sources such as its investment properties.
To be transparent, I have always considered IGBB a benchmark in the transformation of i-Bhd from a digital appliance group into a property one. When i-Bhd ventured into property development, there was the concern that we were venturing into a cyclical sector.
IGBB’s strong recurring income activities provided a good role model on how to dampen the impact of the property development cycle. That is why a substantial part of i-Bhd capital today have been deployed for investment properties. But this is a story for another day.
In this article, I will just focus on the stock investment perspective. I will look at the key drivers of performance and assess whether there is still a margin of safety.
Join me as I look at the prospects of IGBB and see why I will continue to hold despite making some capital gain so far.
Should you go and buy it? Well, read my Disclaimer.
Contents
- Company background
- Operating performance
- Financial position
- My investment in IGBB
- Valuation
- Is IGBB an investment opportunity?
- Conclusion
|
Company background
The present form of IGB Berhad (IGBB or the Group) is the result of several corporate exercises.
- IGBB was incorporated as a private limited company in 2000. It was converted into a public limited company and renamed as Gold IS Berhad in 2001.
- On 8 May 2002, Gold IS Berhad assumed the listing status of Tan & Tan Developments Berhad (Tan & Tan). This followed the completion of the merger between Tan & Tan and IGB Corporation Berhad (IGB Corp).
- In 2013, following the adoption of FRS 10, the results of IGB Corp were consolidated into the results of IGBB.
- In 2014, IGBB made a voluntary general offer for the remaining shares in IGB Corp and became its parent company.
- In March 2018, IGBB completed its effort to acquire IGB Corp’s remaining shares that it did not already own by way of a Scheme of Arrangement resulting in 100% ownership in IGB Corp. Gold IS was renamed IGB Berhad.
IGBB is today one of the largest listed property companies in Malaysia with footprints across Asia, Australia, the United States of America, and the United Kingdom. The company reported its businesses under 6 segments.
- Retail. The main components consist of Mid Valley Megamall, The Gardens Mall, and The Mall, Southkey Megamall in Johor. Mid Valley Megamall and the Gardens Mall are held under the IGB REIT that was listed on Bursa Malaysia in 2012,
- Commercial. The Group manages 12 commercial properties in the Klang Valley and Johore. 10 of the properties are held under the IGB Commercial REIT that was listed on Bursa Malaysia in 2021.
- Residential. Notable projects here included Sierra Mas and U-Thant Residence.
- Hospitality. Currently, the Group commands 5,248 room keys globally. The Group’s brands included St. Giles and Cititel.
- Construction. This is an in-house construction arm.
- Others. This included the treatment of wastewater in China and the IGB International School.
Unlike most of the Bursa property companies, the bulk of IGBB revenue comes from recurring income sources. Over the past 11 years, the project-based activities (from property development and construction) on average accounted for about 14% of the Group’s PBT.
Regarding revenue and EBIT contribution, the Retail segment was the largest contributor. In 2023, it accounted for 51% of the Group’s revenue and 73 % of the Group’s EBIT. Refer to Chart 1.
 |
| Chart 1: 2023 Segment Revenue and EBIT |
Operating performance
I looked at 2 groups of metrics to get a sense of where the business is heading. Refer to Chart 2.
- The left part of Chart 2 tracks the trends of 3 metrics – revenue, PAT, and gross profitability (gross profits/total capital employed).
- The right part of Chart 2 tracks the trends of 3 return metrics – operating return (NOPAT/total capital employed), ROE, and ROA.
While there were growths in revenue, PAT, and gross profitability, the bulk of the growth seems to be from post-2020. You can see the impact on the Group during the COVID-19 years. The positive signs are that the values in 2023 are higher than those in 2013.
Over the past 11 years, revenue grew at 3.7 % CAGR while PAT grew at 4.4 % CAGR. This is not a high-growth Group. The other positive sign was the growth in gross profitability at 1.3 % CAGR indicating an improving capital efficiency.
Given the profit and gross profitability trends, you should not be surprised to see similar trends in the returns. Over the past 11 years, the Group achieved the following average returns:
- 6.1 % for the Operating return.
- 8.8 % for the ROE.
- 4.0% for the ROA.
IGBB is unusual in that its ROE was higher than the Operating return. This was because, over the past 11 years, the interest and investment income on average accounted for about 14% of the PBT.
I have some concerns about the average returns as they seem to be lower than the current cost of funds. Based on Damodaran’s approach, I estimated the cost of equity to be 9.2 % and the WACC to be 6.3 %. You can see that the past 11 years' average ROE and Operating return were marginally lower than the respective cost of funds.
 |
| Chart 2: Performance Index and Returns Note: I started the analysis in 2013 when IGB Corp results were consolidated into that of IGBB. |
Segment performance
To get a better understanding why the returns were low, I modelled the Group as comprising 3 components:
- Property investment component where there is strong recurring income stream.
- Property development, construction, and hospitality component.
- The unallocated corporate and other business segments.
I next looked at the TCE or total capital employed (equity + debt) and the profits achieved by each of them.
The TCE for each of the above components was based on the net assets as reported in the 2023 Annual Report plus an estimated debt. The debt for each component was based on allocating the total debt by the net assets employed.
We then have the picture as shown in Chart 3.
 |
| Chart 3: Distribution of TCE by component |
I next estimated the average profits generated by each of the components over the past 11 years. Based on this, I estimated the component returns defined as Profit/TCE. Refer to Table 1.
- The best return came from the investment properties.
- The property development, construction and hospitality component delivered comparatively low return.
- The Others had negative profit. This is because this component absorbed the Group’s interest charges.
Note that this is a back-of-envelop analysis as the Group’s unallocated corporate charges and interest charges are accounted under the Others.
57% of the TCE was deployed for the property development, construction and hospitality component. But this component delivered low profits. Another 19 % of the TCE under the Others component delivered losses. This explains why the overall return for the group was low.
 |
| Table 1: Component performance Notes a) 2023 TCE = Equity + Debt. The equity portion was based on the net assets in the Segment Report. The debt portion was based on allocating the debt based on the Net assets. b) 2013 to 2023 average. The profits for the Property Dev, Hosp & Cons and Investment Properties components are EBIT-based. Others included the corporate charges and interests for the Group. |
Peer comparison
I compared IGBB’s performance with some of the Bursa property companies which have both development and property investment arms. Refer to Chart 4.
- IOI Properties Group Berhad. This company has property investment and development activities in Malaysia, Singapore, and the People's Republic of China.
- Sime Darby Property Berhad. This company has property development, investment and asset management, and leisure activities in Malaysia, Singapore, and the United Kingdom.
- Sunway Berhad engages in property development and investment, construction, trading, and manufacturing. It operates in Malaysia, Singapore, China, India, Australia, Indonesia, and internationally.
- United Overseas Australia Limited (UOA) engages in the development and resale of land and buildings in Australia, Malaysia, and Vietnam. Although this company is dual-listed in Australia and Singapore, its main operating subsidiaries are listed on Bursa Malaysia.
Except for UOA, IGBB's return on capital was better than the other companies over the past 11 years. In the case of UOA, IGBB outperformed it post-COVID-19.
 |
| Chart 4: Peer performance |
Prospects
Given the size of the contribution from the Retail segment, it is more appropriate to look at the prospects of this sector rather than the property development sector.
According to Mordor Intelligence, the Malaysian retail industry has been one of the largest contributing sectors to the country's gross domestic product for the past decades. Mordor forecast this sector to grow at a CAGR of 5.94% during the forecast period 2024-2029.
I think this mid-to-long-term outlook provides an opportunity for IGBB to grow its retail segment revenue and earnings.
Financial position
I would rate IBGG as financially sound based on the following.
- As of the end of Dec 2023, it had a Debt Equity ratio of 0.88. This has come down from its 2014 peak of 1.23.
- As of the end of Dec 2023, it had RM 1.3 billion of cash and cash equivalents. This is about 15% of its total assets.
- Over the past 11 years, it generated positive cash flow from operations every year. During this period, it generated a total of RM 3.9 billion from the cash flow from operations. The total profit over this period was 3.7 billion. I would consider this as a reasonable cash conversion ratio.
- It had a low average Reinvestment rate over the past 11 years of 20%. This meant that the Group did not have to channel a lot of its funds to deliver growth. I defined Reinvestment = CAPEX & acquisition – Depreciation & Amortization + increase in Net Working Capital. The Reinvestment rate = Reinvestment/NOPAT.
- The Group has a good capital allocation plan as shown in Table 2. The cash flow from operations was sufficient to fund the CAPEX and acquisitions.
 |
| Table 2: Sources and Uses of Funds 2013 to 2023 |
My investment in IGBB
I first invested in IGBB in 2018 at around RM 3.00 per share. At that juncture, with its NTA at RM 4.26 per share I figured that there was enough margin of safety. Over the next few years, there was treasury share distribution as well as a bonus issue. The result was that my average purchase cost came to RM 1.95 per share.
The market price for IGBB as of the end of March 2024 was RM 2.45. The capital gain, together with the dividends meant a return of 6.4 % CAGR. Refer to Table 3.
 |
| Table 3: My return in IGBB |
The above is not the full picture because in mid-2021 when IGBB listed its Commercial REIT (C-REIT) it offered the existing shareholders the following:
- 2 Commercial REIT shares at RM 1.00 each for every 5 shares held.
- A distribution in specie (DIS) of the Commercial REIT shares based on 3 DIS for every 2 Commercial REIT shares subscribed.
When looking at the return, I should consider the investments in IGBB as well as in the C-REIT. Table 4 shows such an analysis where the average holding period or duration is based on the total cost-weighted average basis. On such a basis my total return for all the investments related to IGBB is 6.7 % CAGR.
 |
| Table 4: My overall return Notes: a) 5.02 = [ (5.25 X 30) + (2.75 X 3.08) ] / (33.08). b) The total cost and total gain for C-REIT is shown in Table 5. |
 |
| Table 5: My return in C-REIT |
|
Valuation
I determined the intrinsic value of IGBB based on 2 methods
- Asset-based. I valued IGBB at RM 7.82 per share.
- Sum-of-parts. I valued IGBB at RM 5.13 per share.
The market price of IGBB as of 30 May 2024 was RM 2.48 per share. As such there is more than a 30% margin of safety under both bases. I would consider IGBB an investment opportunity.
Asset-based valuation
With a large investment property base, you may think that an appropriate way to value IGBB is to look at the Asset Value. However, the Asset Value understates the value of the Group because most of the investment properties are carried at historical cost rather than current market value.
We are fortunate that IGBB has 2 listed REITs which are required to carry out annual valuations of its investment properties.
In this context, the 2023 Book Value of its investment properties was stated as RM 3.87 billion. However, in the Notes to the Accounts, IGBB reported that the fair market value of its investment properties totalled RM 10.67 billion.
On such a basis, I determined the Asset Value of IGBB to be:
- RM 2.98 per share based on its Book Value.
- RM 7.82 per share based on the fair market value of investment properties. Here I assumed that the fair market value is apportioned between the minority shareholders and the ordinary shareholders.
Sum-of-parts valuation
I chose this method of valuation because not all the business segments were delivering returns that were commensurate with the net assets used. I thus gave priority to the earnings perspective where appropriate.
In my sum-of-parts valuation of IGBB, I modelled the Group as comprising 3 components mentioned earlier.
- Property investment component where the value is based on the fair value.
- Property development, construction, and hospitality component where the value is based on the Earnings Power Value (EPV).
- The unallocated corporate and other business segments.
In this context, the fair value of investment properties provided a more realistic picture of the earnings power. This is because in determining the fair value, the valuers considered the income approach and market approach.
“..fair value…based on income approach is derived from an estimate of the market rental which the investment properties can reasonably be let for…” 2023 Annual Report.
The value of IGBB based on this approach was RM 5.13 per share as shown in Table 6. You can see that there were different bases for estimating the values for the various components.
Note that by using the EPV for the property development, hospitality, and construction component, I have taken a pessimistic value that if the returns do not improve, there would be potential write-downs of the asset values.
 |
| Table 6: Sum-of-part valuation Notes a) The Equity value under the TCE column is based on the total TCE. For the valuation column, it is the sum of all the valuation values. b) EPV based on past 11 years EBIT with 24% tax rate. |
Is IGBB an investment opportunity?
IGBB is an unusual Bursa property company in that a large part of its revenue comes from a recurring income base. Over the past 11 years, the project-based activities from property development and construction only accounted on average for about 14 % of the Group EBIT.
Furthermore, a big portion of the Group business is dependent on the Malaysia retail sector. This is projected to grow at 5.94 % over the next 5 years thereby providing the Group with a steady but single-digit growth path.
The Group is also financially sound with a low Reinvestment rate and a good capital allocation track record.
Are there concerns?
First, the historical Operating returns and ROE were lower than the WACC and cost of equity respectively. There was no shareholder value creation from a business perspective. If you believe that the economic climate in the next 10 years will be better than the past decade, this may not be a big issue.
Next, this is not a high-growth company. But I have already accounted for this by using the EPV in my valuation of the property development, construction, and hospitality component.
The attractive part is that there is currently more than a 30% margin of safety based on both the Asset Value and sum-of-parts value. I see IGBB as an investment opportunity.
Of course, from an investor like me who bought IGBB years ago, you would have gotten some decent returns so far. Based on my analysis, it makes sense to continue to hold onto the shares until the market re-rates higher.
Conclusion
The transformation of IGBB into its present form represents a journey marked by corporate exercises and expansions. The company's evolution included pivotal moments such as taking over the listing status of Tan & Tan Developments Berhad and the consolidation of IGB Corp's results.
The Group today has six business segments. The Retail segment has emerged as the primary revenue contributor, accounting for 51% of the Group's revenue and 73% of its EBIT in 2023. IGBB distinguishes itself from its peers by deriving the bulk of its revenue from recurring income sources rather than project-based activities.
Over the past 11 years, there were growths in revenue, PAT, and gross profitability, albeit with fluctuations influenced by external factors such as the COVID-19 pandemic. The Group achieved improving capital efficiency and reasonable ROE and ROA.
The prospects for IGBB appear promising, particularly within the Retail segment. This is supported by forecasts of sustained growth in the Malaysian retail industry. I have mentioned the low returns from property development, construction and hospitality segments. If IGBB could improve the performance of these sectors, there would be more upside.
From a stock investment perspective, there is more than a 30% margin of safety at the current market price. IGBB is an investment opportunity.
End
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
How to be an Authoritative Source, Share This Post
|
Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.
Comments
Post a Comment