IOIPG share price had been on a downtrend after the announcement of Q4 FY2024 results in late August, despite the record quarterly profits boosted by revaluation gain at IOI Central Boulevard (IOICB). Short term traders took profit after the record quarterly profit announcement, typically buy on rumour, sell on news behaviour. There was no notable selling by foreign funds in past few weeks, while EPF was seen accumulating millions of shares on share price weakness.

Most analysts downgraded IOIPG after the Q4 result, citing concerns on huge interest expenses at IOICB which will kick in from Q1 FY2025 as the final TOP is received in September 2024. Analysts are no longer talking about the high gearing issue at IOIPG, which they had overblown the concern, as the huge revaluation gain from IOICB has reduced IOIPG net gearing to below 70% and IOIPG has rejected the CEO offer to take over Shenton House redevelopment project. These sell-side analysts are likely overblowing the issue of high interest expenses which they think may erode the profits of IOIPG. I shall examine the impact of the interest expenses at IOICB on the profit level of IOIPG for the next 4 quarters in FY2025 in a section below.

New Industrial Parks

On 13 September 2024, IOIPG celebrated the milestone launch of its IOI Industrial Park series, consolidating the Group’s industrial offerings under one banner and positioning the industrial segment as a major revenue contributor in coming years. Comprising IOI Industrial Park @ Banting, Selangor, IOI Industrial Park @ Iskandar Malaysia in Johor, and upcoming plans in Melaka, the IOI Industrial Park series coincides with the rebranding and expansion of iSynergy @ Kulai from 507 acres to 1,100 acres.

“Leveraging on IOI Properties’ sizable and strategic landbank, the IOI Industrial Park series is aligned with Malaysia’s visionary target of achieving at least 10% growth year-on-year in approved investments. This comes amid wider international interest driven by our value proposition in terms of the country’s strategic location, skilled labour, mature infrastructure and utilities including roads, world class ports, and our national grid,” said The Chin Guan, Group Chief Operating Officer, IOIPG.

“With three industrial parks, including one under planning, in industrial growth areas such as Johor, Selangor and Melaka, I am confident that the launch of the IOI Industrial Park series readily positions the Group as one of the premiere industrial developers in the country. We are looking towards a potential revenue contribution of at least 20% per annum from our industrial portfolio over the next few years,” he added.

Following its first phase of semi-detached and detached factory units, which were fully sold out, IOIPG expanded IOI Industrial Park @ Iskandar Malaysia to 1,100 acres by rezoning part of the Group’s existing 5,000-acre landbank in Johor. Now launching its 200-acre second phase comprising semi-detached factories, built-to-suit factories and land parcels with an estimated GDV of RM800 million, the rebranding builds on the success of its first phase which are now fully sold.

IOI Industrial Park @ Iskandar Malaysia is strategically located at Kulai within the Iskandar Malaysia region, with connectivity to major land, air and sea terminals. It is just 9km from Senai International Airport, 47km from the Port of Tanjung Pelepas, 50km to Pasir Gudang Port and 68km to Tanjung Langsat Port. Woodlands Checkpoint is just 40km away, providing accessibility to Singapore’s network of sea ports, along with easy connectivity to the North-South Expressway, Malaysia-Singapore Second Link and Senai-Desaru Expressway.

The guarded park with freehold titles benefits from faster start-up times and approvals for investors and operators through the Kulai Fast Lane initiative. Championed by Majlis Perbandaran Kulai, the Kulai Fast Lane allows the submission of building plans to be done concurrently with the submission of development orders as well as land matters, helping cut down on planning and approval times along with earlier commencement or work, machine installation and more.

The 1,100-acre industrial park’s strategic location allows it to cater for a range of industrial investors, from regional MNCs to fast-growing local industry players seeking a well-planned and sizable integrated industrial park. These include the electrical & electronics segment and biomedical players, as well as pharmaceuticals, logistics, warehousing & packaging, and cold chain logistics.

The industrial park is envisioned to benefit from specific policy catalysts such as the proposed Johor-Singapore Special Economic Zone as well as the ongoing diversification efforts by global players under the China Plus One strategy, drawing further interest and attention to Malaysia’s southern development corridor. IOI Industrial Park @ Iskandar Malaysia’s proximity to IOIPG’s flagship township Bandar Putra Kulai also provides accessibility to a mature range of amenities and facilities, as well as a ready working population. This includes leisure hotspots such as the 27-hole Palm Villa Golf & Country Resort and IOI Mall Kulai, as well as schools, healthcare facilities and a Town Park. Bandar Putra Kulai has seen more than 16,000 residential units completed to date, with an estimated population of 65,000.

IOI Industrial Park @ Banting

Bringing the IOI Industrial Park series to Central Malaysia, IOI Industrial Park @ Banting spans 322 acres with an estimated total GDV of more than RM1.5 billion, offering 53 cluster, semi-detached and bungalow factory units in its first 70-acre phase, along with land parcels for sale. It is projected for launch by Q2 2025.

Located within the mature cluster of the Banting industrial zone, just 15km away from Kuala Lumpur International Airport, the industrial hub also has close connectivity to Port Klang 52km away by road, which will be further enhanced by linkage from the West Coast Expressway (WCE). It features 2km of prime frontage along the Banting-KLIA Highway, and is just 7km from the upcoming WCE Banting Interchange, shortening travel time to Port Klang while offering unparalleled access to air & sea terminals as well as inner Klang Valley through direct connections to numerous major highways.

Operators will benefit from the two high-voltage TNB transmission lines flanking IOI Industrial Park @ Banting, providing ease of connectivity to manufacturing and industrial players such as data centres that require high power loads.

IOI Industrial Park @ Banting caters for light and medium industries, and is particularly suitable for operators that require excellent air & sea port connectivity, high power loads and frontage visibility. This includes the electrical & electronics segment, plastics & packaging, machinery, chemical, warehousing & logistics.

Venturing into the Melaka industrial market

Rounding out the IOI Industrial Park series, IOIPG is exploring the expansion of its industrial offerings to Melaka, with an initial allocation of 200 acres off the North-South Expressway near the Ayer Keroh toll, out of its 800-acre land bank in Melaka.

“While plans are still in the pipeline, we can share that this move aligns with rising investor interest in Melaka’s industrial sector, with numerous international players already in operation within the state. Our presence here will round out our portfolio while carrying the IOI Industrial Parks series’ distinctive hallmarks of strategic location, connectivity and well-thought-out master planning,” concluded Teh.

According to UOBKH Research, IOIPG will soon hold about 1,275 acres of industrial landbank (double from its initial industrial landbank of 590 acres) with the expansions.

“This will position IOIPG as a key player in the industrial real estate space, larger than Eco World Development Group Bhd’s 1,176 acres and second only to Sime Darby Property Bhd which has about 3,000 acres.

“This scale of landbank, combined with strategic monetization and industrial demand, should positively impact IOIPG’s long term financial performance, enhancing its competitiveness in the market,” the research house said.

It noted that the group is planning to set up two more industrial parks over the next three to five years in other regions. Looking ahead, The said that the group also has sizable land abnk in Bahau, Negeri Sembilan and Segamat, Johor, which may also be turned into industrial parks.

Apart from this, IOIPG is exploring opportunities to sell portions of its industrial land bank to data centre operators, beyond the traditional build-to-sell industrial property mode. Asked if there will be any data centres at its industrial parks, The said the group has received “quite a few enquiries” from data centre players for its industrial parks in Banting and Iskandar Malaysia.

“Hopefully we can have some good news in the next one or two months,” he added.

The group is in discussions with four to five data centre operators in Kulai, Johor with potential land sales priced at a minimum of RM100 per sq ft.

“IOIPG’s Kulai land cost is RM2 per sq ft, as reported in the financial year 2023 annual report. This pricing far surpasses the RM75 per sq ft achieved by Eco World in its recent land sale to Microsoft.

“Such a strategy offers the potential for substantial margins, capitalizing on the booming demand for data centre infrastructure. With IOIPG’s industrial landbank in Kulai currently standing at 750 acres after expansion, even a partial sale to data centre players could generate significant proceeds,” the research house said.

As an illustration, a land sale of 50 acre at RM100 psf will bring in cash proceeds of RM218 million to IOIPG. A recent check with the investor relation chief of IOIPG revealed that the company was in advanced negotiation to dispose of a piece of land of 50 acres in Kulai to a data centre player at around RM100 psf.

Concern on High Interest Expenses at IOICB?

IOI Central Boulevard is set to receive the final Temporary Occupancy Certificate (TOP) in November – December 2024 based on recent check with IOIPG IR chief, hence there are analysts’ reports saying that IOIPG will start to expense off the interest expenses at IOICB from as early as Q1 FY2025 (July-September 2024). The Singapore subsidiary has been capitalizing interest expenses up to 30 June 2024, which amounted to S$3.0 billion.

Hong Leong research analyst was the first one on 9^th August 2024 to highlight the issue of high interest expenses which would kick in from Q2 FY2025 as he assumed that the final TOP would be received by IOICB in September 2024. Other analysts followed the tone after the Q4 FY2024 result announcement but some brought forward the start of interest expenses to Q1 FY2025.

The first TOP was received in April 2024 and the second TOP was received in early July 2024. There was no interest cost expensed off in the P&L in Q4 FY2024 though the first TOP had been received in April. Hence it should be clear that interest expenses should start to kick in only after the final TOP is received. Now that the final TOP is delayed to November-December 2024 from the earlier expected September, hence I think interest expenses should only start to kick in from Q3 FY2025 (Jan-Mar 2025). But to be more conservative, I assume interest expenses to start kicking in from Q2 FY2025 (Oct-Dec 2024) in my earnings projection below.

Hong Leong analyst reported that most of the S$3.0 billion debt at IOICB was at floating rates averaged at 4.80%, for which I have checked with IOIPG IR chief who confirmed that the interest rates at IOICB were indeed floating at slightly below 5.0%.

As US Fed has reduced fund rates by 50 bps in its September meeting and Singapore interest rates tend to move in tandem with US rates, I assume that the average interest rates at IOICB will reduce to 4.30% p.a. in Q2 FY2025. Though averaged rates should be lower as US Fed is expected to cut rates by 25 bps in its early November meeting and by another 25 bps or 50 bps in its December meeting, but I only assume the 50 bps cut in September to apply for the entire Oct-Dec quarter.

Hence interest expenses at IOICB may amount to S$3.0b x 4.3% /4 = S$32 million or RM106 million in Q2 FY2025. Plus the base interest expense of RM5m a quarter at IOIPG (based on actual RM19m interest expense in FY2024), total interest expense in Q2 FY2025 may amount to RM111 million.

Going into Q3 FY25 (Jan-Mar 2025), US fund rates would have been cut by additional 50-75 bps by end Dec 2024, so I assume averaged interest rates at IOICB will reduce to 3.80% and hence interest expenses will reduce to RM99 million in Q3 FY25.

For Q4 FY25 (Apr-Jun 2025), I assume US Fed would have cut rates by another 25 bps in Jan-Mar 2025 period and hence averaged interest rates at IOICB will reduce to 3.55%. Total interest expenses will reduce further to RM93 million in Q4 FY2025.

Going into FY2026, US fund rates would have been cut by a total of 1.50%-1.75% from early September 2024 to June 2025 and cut by another 50 bps in 2H CY2025, hence averaged interest rates at IOICB will reduce to 3.30% in July 2025 then down to 2.80% in Jan 2026. US Fed dot plan indicates another 50 bps cut in CY2026, hence averaged interest rates at IOICB may fall further to 2.3% by June 2026.

You can see that from the anticipated rate cuts of 100 bps in 2H 2024 and another 100 bps cuts in CY2025, IOIPG is looking to save interest expenses of S$30 million in 2025 and at least S$60 million a year from 2026, which are substantial savings to the company.

IOIPG management has a target to ramp up tenancy at IOICB from currently 50% to 80% by end of 2024. By delaying the final TOP slightly to November-December, the company may avoid suffering any loss at IOICB in Q2 FY2025 if interest expenses may start only from Q3 FY2025 when rental income from the increased 80% tenancy at IOICB will be able to cover the interest expenses:

    1.29m sf x 80% x S$13.00 psf x 3 mths = S$40 million of rental income a quarter

vs interest expenses of S$3.0b x 3.8% /4 = S$28.5 million.

But in my base case projection below, I still assume interest expenses to kick in from Q2 FY2025 to be more conservative.

Earnings Projection for Q1-Q4 FY2025

I have done simple projections of the pretax profit (PBT) for each segment of IOIPG for the next 4 quarters, i.e. Q1 FY2025 (July-Sept 2024), Q2, Q3 and Q4 FY2025 (Apr-Jun 2025) based on the following assumptions:

·         Property Development revenue will mirror that of the latest 2 quarters, Q3 & Q4 FY2024 minus the RM211m for Johor land disposal, totalling RM1.9 billion in FY2025. This segment operating profit is calculated using the same PBT margin as recorded in Q3 & Q4 FY2024

·         Property Investment revenue for Q1 FY2025 is estimated to be the same as Q4 FY2024 figure of RM198m plus rental contribution from IOI Business Park in Xiamen, China (371k sf NLA) with 100% tenancy at around RM2.00 psf, rental contribution from new major tenants at IOI City Tower 1 (193k sf NLA) at around RM5 psf, and rental contribution from Selangor Integrated Circuit Design Park at PFCC, Puchong (around 45k sf NLA) at RM4+ psf. Assume no additional tenant secured at IOICB in Q1, tenancy remains at 50% at IOICB; segmental profit margin assumed to remain the same as Q4 FY2024

·         Property Investment revenue for Q2 FY2025 (Oct-Dec 2024) will get a boost from additional tenants at IOICB, assuming an averaged tenancy of 65% at IOICB (50% in Q1 FY25 and 80% targeted by year end)

·         Property Investment revenue for Q3 FY2025 (Jan-Mar 2025) will have rental contribution from IOICB at 80% occupancy

·         Property Investment revenue for Q4 FY2025 (Apr-Jun 2025) will assume 90% occupancy at IOICB

·         Property Investment PBT is assumed to increase in tandem with the increased revenue at IOICB based on higher assumed occupancy rate in Q2-Q4 FY2025

·         Hospitality & Leisure segment revenue is assumed to remain flat in Q1 FY2025, then increase by 10% in Q2 & Q3 FY2025. Segmental PBT is assumed to be at similar loss level of RM10m in Q1 FY2025 as in Q4 FY2024 (after striping out the RM97m of one-off higher depreciation and write-off of hotel assets in Q4 FY24), then to break even in Q2 and turns in a small profit in Q3 & Q4 FY2025

·         I have added in a new segment called Industrial Park after the launch of IOI Industrial Park series by IOIPG in early September 2024. Total revenue from the Industrial Park segment is assumed to be RM400 million or about 20% of property development revenue for FY2025. PBT margin for this segment is assumed to be at 30% (as the land cost for the industrial park is reportedly very low at around RM2 psf at the Kulai park)

·         The extraordinary items include a disposal gain of RM70m from a land sale in Melaka in Q1 FY25 and a land sale of 50 acres in Kulai to a data centre player at RM100 psf in Q3 FY25. In Q4 FY2025, I assume IOICB will be revalued up to S$4.5 billion from S$4.15 billion as revalued on 30 June 2024.

·         Interest expenses are assumed to be RM5m per quarter (as per FY2024) plus additional interest expenses at IOICB which is assumed to start from Q2 FY2025 with averaged interest rate of 4.3% in Q2, 3.8% in Q3 and 3.55% in Q4 FY2025.

As can be seen from the table above, Q1 FY2025 PBT may be on the high at RM299 million with an assumed RM70m of disposal gain booked in from a Melaka land sale. Core PBT is commendable at RM229 million as interest expenses at IOICB are not yet expensed off in the P&L. Q2 FY2025 profits will take a hit as interest expenses kick in at IOICB (estimated at RM106 million at average rate of 4.3%), but it will be still decent at RM173m partially boosted by assumed higher tenancy (65%) at IOICB in the quarter.

Q3 FY2025 PBT will be boosted with a land disposal gain of RM213m (assumed land sale of 50 acres in Kulai at RM100 psf). Core PBT will increase to RM220 million boosted by higher tenancy (80%) at IOICB in the quarter.

Q4 FY2025 PBT will be further boosted with a revaluation gain of RM1.155 billion from a second round of revaluation of IOICB to S$4.5 billion on 30 June 2025 (potentially higher if tenancy is over 95%, or potentially no revaluation gain if tenancy remains at 50% then).

Core PBT will be more than RM250 million a quarter when tenancy at IOICB can reach 90% as assumed, annualised PBT will exceed RM1.0 billion even before earnings contribution from Marina View Residences, another champion project in Singapore.

Multiple Catalysts Ahead

As calculated above, IOIPG earnings will be on the rise going into FY2025 even after interest expenses kick in at IOICB from Q2 FY2025. Core PBT of RM880m in FY2025 will be 36% higher than the core PBT of RM645m (after deducting est. RM100 gain from Johor land disposal) in FY2024.

I have argued earlier that land disposal is part and parcel of IOIPG business operations given that it owns large tracts of land in Johor (>3,700 acres undeveloped) and Selangor. If I include the land disposal gain for the Melaka land sale in Q1 and Kulai land sale in Q3 FY25, I will get total PBT of RM1.16 billion for FY2025, 56% higher than the RM745m in FY2024.

Net profit will come in at about RM880 million or EPS of 16 sen for FY2025, increasing to RM1.3 billion level in FY2026 as earnings contribution from Marina View Residences kicks in, IOICB achieves higher tenancy of 95% and industrial parks at Iskandar, Banting and Melaka gain tractions. At current price of RM2.14, IOIPG is trading at forward PER of 13x FY2025 earnings, falling to just 9x in FY2026. This is totally unjustified for a blue chip property company that boosts the highest profits and high proportion of recurring income.

Eco World is trading at forward PER of 23x FY2025 earnings and 19x FY2026 earnings.

Mah Sing is trading at forward PER of 14x FY2025 earnings and 13x FY2026 earnings.

SP Setia is trading at forward PER of 19x FY2025 earnings and 19x FY2026 earnings

UEM Sunrise is trading at forward PER of 48x FY2025 earnings and 31x FY2026 earnings

Mah Sing does not have much landbank as it typically rolls out fast turnaround projects, so it is not entirely comparable with IOIPG. More comparable will be SP Setia and UEM Sunrise which both have substantial landbank in Selangor and Johor.

Hence, I think it is reasonable for IOIPG to trade to a PER of 19x, same as SP Setia and Eco World. I am looking forward to IOIPG share price rising towards RM3.00 in FY2025 and RM4.50 in FY2026 based on 19x PER.

IOIPG will have multiple re-rating factors in coming quarters for the share price to move towards the above target prices:

·         IOICB secures another 30% tenants in Oct-Nov 2024 to achieve its targeted tenancy of 80% by year end

·         US Fed cuts fund rates by another 25 bps on 7 November

·         Marina View Residences is launched in Oct 2024 and receives warm response

·         US Fed cuts fund rates by another 25 bps / 50 bps in December meeting

·         The company seals up the sale of land to a data centre player in next 1-2 months

·         Good take-up rates at its Iskandar, Banting and Melaka industrial parks in next few months

·         Launching of new industrial parks in Negeri Sembilan and Segamat in 2025/2026

·         IOICB secures more tenants to achieve occupancy of above 90% by mid 2025

·         Injection of IOICB into a commercial REIT in Singapore in 2H 2025 / 2026

·         Turnaround of hotel business from 2025

·         Phase 3 expansion at IOI City Mall to add another 1.0 million sf NLA

·         Strong earnings contribution from W Hotel, KL and the newly opened Moxy Hotel, Putrajaya

·         Setting up a hospitality REIT in Malaysia to house all the hotels of IOIPG in 2025/2026

·         Further rate cuts by US Fed in 2025 (expected another 100 bps cuts in total in 2025 based on current dot plan)

·         Injection of IOI City Mall, IOI Mall Puchong, IOI Mall Kulai and the matured office towers into a commercial REIT in Malaysia which may be worth RM6.5 billion

·         Injection of IOI City Mall Phase 3 (1.0m sf NLA) into the commercial REIT once matured to recycle capital

·         Monetisation of more non-core land assets (easily 500 acres of land in Kulai available for sale to data centre players if the price is at RM100 psf or above)

·         Strong rebounds in rental income from Tropicana City Mall and injection into the commercial REIT, which may be worth RM1.0-1.5 billion

·         Commencement of W Hotel, Singapore in 2028

            Original article was published on 7th Oct 2024 at dragonleong.substack.com