IOIPG is acquiring Tropicana Gardens Mall from Tropicana Indah Sdn Bhd, a 70%-owned unit of TROP (Not Rated) for RM680m cash. We believe the acquisition is a good opportunity for IOIPG, i.e. buying a loss-making mall at a discount to its asset value with the intention to turn it around. We maintain our forecasts, TP of RM1.75 and UNDERPERFORM call.

IOIPG is buying Tropicana Gardens Mall in Kota Damansara from Tropicana Indah Sdn Bhd for RM680m cash. The 4-year-old mall has a 7-storey retail podium with 457 stores and 2,190 car park bays. It encompasses a gross lettable are of almost 3m sf and is located on leasehold land expiring on 25 April 2106.

The mall was only profitable for one year since opening in Mar 2020. It made RM0.5m in FY21 (Dec), but was in the red in FY20 (-RM30.1m), FY22 (-RM11.9m) and FY23: (-RM16.0m).

We believe the move is opportunistic as IOIPG is getting the asset at a 28% discount to book value/replacement cost of RM943.6m and the intention is to turn it around is backed by the group’s multi-decade experience in developing and managing shopping malls.

The acquisition will increase IOIPG’s net gearing of 0.73x as at end-Mar 2024 to 0.76x, which is still manageable.

Forecasts. Maintained. While we expect the mall to remain in the red over the immediate term, it is unlikely to put a significant dent on IOIPG’s profits.

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 assumption for the 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 continue to like IOIPG due to: (i) its focus on high-value products in 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. Maintain UNDERPERFORM.

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 - 24 Jul 2024