IOIPG is acquiring W Hotel, KL from Tropicana Residences Sdn Bhd (TROP) for RM270m cash. We believe the price tag is fair towards IOIPG and the addition of the hotel would bolster its hospitality portfolio, especially with the returning tourism sector. We maintain our forecasts, TP of RM1.75 and MARKET PERFORM call.

IOIPG (via its indirect subsidiaries IOI PFCC Hotel Sdn Bhd and Flora Development Berhad) signed a sale and purchase agreement with TROP to acquire W KL and its assets for RM270m. The agreement was reached on a willing-buyer-willing selling basis and is expected to be completed by 1QCY24. W KL is a 5-star hotel that features 25-storey, 150-room together with hotel facilities and 346 parking spaces.

Fairly priced. The acquisition cost of RM270m (translating to RM1.8m/key) is slightly above 1.0x of W KL’s net book value of RM265.1m (or RM1.77m/key). While hotel asset transactions are infrequent within Kuala Lumpur, we gathered that TROP had in 2016 intended to dispose of W KL for RM360m (c.RM2.4m/key) when market value likely lingered towards RM1.6m-RM1.8m. Supporting this was the disposal of Renaissance Hotel KL (also in 2016) by IGB Corporation for RM765m (@RM1.88m/key for 406 rooms). By these accounts, we deem IOIPG’s acquisition cost to be fair.

Strong addition to IOIPG’s portfolio. Given the above, we are overall positive with the acquisition given W KL’s strategic location and the anticipated full recovery of Malaysia’s tourism sector by next year surpassing pre-Covid 19 levels, This has the potential to contribute to the long-term earnings of IOIPG. Based on its 1QFY24 earnings, the hospitality segment made up 8% of group revenue.

Forecasts. The acquisition may only slightly increase IOIPG’s net gearing of 0.70x to 0.71x. That said, details on the profitability of W Hotel is still outstanding and hence we abstain from incorporating model updates for now.

We 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).

We continue to 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. Maintain 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 - 7 Dec 2023