IOIPG’s 1HFY24 results met expectations. Its 1HFY24 core net profit fell 29% weighed down by a soft property market in China. Its earnings will be driven by high-value projects in Singapore and improved yields from its property investment and hospitality assets.  We maintain our forecasts, TP of RM1.75 but downgrade our call to UNDERPERFORM from MARKET PERFORM after the recent rally in its share price.

Its 1HFY24 core net profit of RM295.9m made up only 38% and 39% of our full-year forecast and the full-year consensus estimate, respectively. However, we deem the results within expectations as we expect a stronger 2H underpinned by high-end projects in Singapore.

YoY, its 1HFY24 revenue declined 8% mostly from reduced property sales recognition in China (-16%), cushioned by stronger performance from property investment (+25%) supported by improved footfall and tenancy (particularly, IOI City Mall).

Its 1HFY24 core net profit fell by a steeper 29% on a 42% decline in its property development operating profit given a significant slowdown in China of which products typically command higher margins, partially cushioned by a 40% improvement in property investment operating profit (thanks to higher rental incomes from the malls and enhanced occupancy rates for the hotels and resorts). Joint venture contributions also dipped by 85% due to higher property tax on the hotel operations in Singapore.

QoQ, its 2QFY24 revenue dipped 6% due to weaker performance from property development (-13%) amidst a soft market in China but was slightly offset by property investment gaining 4% driven by higher rental incomes from its malls and sustained occupancy rates. Mostly attributed to similarly poorer QoQ performance by its joint venture projects in Singapore, 2QFY24 core net profit of RM121.5m declined by 30%.

The key takeaways from its results briefing are as follows:

1. In Malaysia, there is a potential restraint on property buyers due to higher interest rates, while in China, there is a trend of increased caution among buyers, possibly attributed to the economic downturn and a weak job market.

2. On Marina View Residence in Singapore, the group is prioritizing its planned launch for this year. Although construction has not commenced, the completion deadline is set at 84 months post- launch. The focus is on initiating the property's launch, with expectations of long-term earnings.

3. In 3QFY24, IOI Central Boulevard is set to receive the first phase of Temporary Occupation Permit. The group has already secured leases with internationally renowned companies spanning various industries, including technology, financial services, asset management, FMCG, and legal firms. The focus lies on completing construction and increasing the occupancy rate of the project, which is expected to contribute based on uptake. The construction phase is estimated to last for approximately 3-4 years, resulting in long-term earnings.

4. The occupancy rate of IOI City Mall continues to be remarkable, maintaining an average of 95% across the group's entire mall portfolio. Currently, careful market analysis is being conducted to prevent overcrowding from excessive retail spaces.

5. In the hospitality sector, heightened labour costs and electricity tariffs could present short-term profitability challenges.

Nonetheless, the group holds an optimistic outlook, foreseeing potential improvements with the Tourism Malaysia ’s initiative aimed at attracting more international tourists in 2024.

Forecasts. Maintained.

Valuations. We also maintain our RNAV-TP of RM1.75 based on a 60% discount to its RNAV (see Page 3), in-line with our average assumption for the broader property sector. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like IOIPG due to: (i) its focus on high-value products at matured townships with its well-diversified products, (ii) its expanding investment property portfolio which provides recurring incomes, and (iii) its presence in the vibrant property sector in Singapore. However, its valuations have become rich after the recent run-up in its share prices. Downgrade to UNDERPERFROM from MARKET PERFORM.

Risks to our call include: (i) a prolonged downturn in the local property market, (ii) rising mortgage rates hurting affordability, (iii) rising construction cost, and (iv) risks associated with overseas operations.

Source: Kenanga Research - 29 Feb 2024