Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with a higher RNAV-based fair value of RM3.00/share (from RM2.83/share previously) and neutral ESG rating of 3 stars (Exhibits 4 & 7).

• Our FV implies CY25F P/E of 18x, 2.5 standard deviations above its 4-year mean. We believe the premium to be justified given significant contributions expected from recurring income of IOI Central Boulevard upon its completion this year. Additionally, the launches of its major projects in Singapore, namely Marina View Residences with a huge GDV of S$3.5bil (RM12bil) further support substantive earnings growth moving forward.

• IOIPG’s FY24 net profit of RM2.1bil appears to surpass expectations. However, this includes RM1.5bil exceptional net gains which includes RM1.9bil of revaluation gains mainly from IOI Central Boulevard’s RM1.3bil, partly offset by provisions for Sheraton Grand hotel in Xiamen that was delayed in construction and incurred cost overruns. Excluding these items, IOIPG’s FY24 core net profit (CNP) of RM541mil instead missed expectations, coming in 20% below our forecast and and 24% of consensus’.

• YoY, the group’s FY24 CNP fell 16% despite a 13% growth in revenue largely due to a lumpy 4QFY24 accelerated depreciation of RM90mil for the group’s hotels in a kitchensinking exercise given the huge revaluation gains in 4QFY24. Adding back the additional depreciation would mean a flattish FY24 CNP of RM631mil that missed our forecast by a milder 7%. Hence, we maintain FY25F-FY26F earnings for now given the lumpy items in 4QFY24.

• QoQ, the group’s 4QFY24 revenue slid 13% due to 3QFY24 benefiting from Johor land sales of RM211mil. Together with the accelerated depreciation, 4QFY24 CNP plunged 89% to RM24mil.

• In FY24, IOIPG secured new sales of RM2.1bil (+9% YoY), ahead of its sales target of RM2bil (Exhibit 3). New sales were contributed largely by Malaysia (91%) with the remainder from China (9%). 17% of FY24 new sales were proceeds from land sales amounting to RM365mil.

• Meanwhile, the group’s unbilled sales rose 4.2% QoQ to RM717mil, which represents a cover ratio of only 27% of FY24F property development revenue.

• Despite the low unbilled sales cover ratio, we believe IOIPG’s FY25F revenue and CNP remain achievable given the group’s efforts to monetise existing inventory of RM1.9bil (-20% YoY) while overall take-up rate has reached only 35% for the group’s FY24 launches of RM4.5bil (vs. earlier target of RM3bil). Presently, 59% of its inventories are in Malaysia with the remaining 41% in China and Singapore.

• In a separate development, IOIPG has decided not to accept an offer to acquire Shenton 101 Pte Ltd from group CEO Lee Yeow Seng, who holds a 65.7% indirect equity stake in the company, involving in the redevelopment of Shenton House in Singapore. Recall that together with the proposed acquisition of W Kuala Lumpur hotel in Jalan Ampang for RM270mil, Courtyard by Marriott Penang hotel in Jalan Macalister, Georgetown, Penang for RM165mil and 9.9- acre freehold land in Pantai Kok, Pulau Langkawi for RM90mil, the total cash outlay of RM5.2bil from these acquisitions and redevelopments will raise IOIPG’s end-FY25F net gearing from 0.7x to a high 0.92x vs. an average of 0.4x for property developers under our coverage.

• We are mildly positive on this development as the group will not have to take on additional debt for this project. However, IOIPG will instead be Shenton House’s project manager deriving a minimal fee of 2.2% on the construction cost, which could translate to a slight 1.5-1.9% accretion to FY25F-FY27F earnings assuming a 3-year development.

• IOIPG’s major project, Singapore-based Marina View Residences in Singapore carries a huge GDV of SGD3.5bil (RM12bil), incorporating a branded residence concept in collaboration with Marriott International. This is expected to be launched at a hefty price of SGD5,000 psf on a sellable space of 700k sq ft by Dec 2024 while the sales gallery may be ready by October this year. Assuming a conservative 15% take up rate for Marina View by June next year coupled with Malaysian property sales of RM2bil, management could be aiming for a FY25F total sales target of RM3.7bil, which represents a substantive 75% YoY surge.

• Hence, the stock currently trades at a compelling CY25F P/E of 11.5x vs. peers’ 18x. We continue to like IOIPG for its:
  
  1) regional property development portfolio with a strong track record and successful real estate projects in Malaysia, Singapore (Sentosa Cove) and China (Xiamen),
  
  2) substantial contributions from recurring income of IOI Central Boulevard upon its completion in FY25F, along with launches of major projects in Singapore, namely Marina View Residences, and
  
  3) promising growth prospects for its hospitality division, driven by the anticipated tourism resurgence in Malaysia.
  
  Additionally, we anticipate that the recent acquisitions of W Kuala Lumpur and the forthcoming addition of Courtyard by Marriott Penang from Tropicana Corp will further enhance the hospitality portfolio and enhance monetisation prospects via a REIT listing over the longer term upon the completion of IOI Central Boulevard.

Source: AmInvest Research - 29 Aug 2024