Investment Highlights

• We maintain our BUY recommendation on IOI Properties Group (IOIPG) with a lower fair value of RM1.76/share from RM1.80/share based on a revised RNAV valuation, with an unchanged neutral ESG rating of 3 stars (Exhibits 1 & 2).

• The lower valuation stems from a 46% increase in net debt partially offset by higher NAV for its other landbank. We remain positive on IOIPG due to its stable long-term outlook, supported by improving market conditions in China and rising recurring income from its investment properties in Malaysia and Singapore.

• We lower our earnings forecast by 13% for FY22F and 7% for FY23F to address potentially softer sales following the end of the Home Ownership Campaign on 31 Dec 2021 and cautious buying sentiment in the near term due to concerns on higher inflation.

• We recently met up with IOIPG management on the group’s latest development. Here are the key takeaways:
  
  (i) IOIPG has not revealed its guidance on FY22F property sales target. Its property sales in 1HFY22 were only 39% of the RM2.3bil achieved in FY21. This comprised 66% of sales from Malaysia with the remainder from China. The lower-than-expected sales were mainly due to the imposition of the movement control order in 1QFY22.
  
  (ii) We expect the group’s 2HFY22 and FY23 sales to be stronger, supported by the launching of projects totalling RM2bil in FY22F and the gradual recovery of post lockdown market sentiment. The major projects are Xiamen 2 (RM476mil), Xiamen 3 (RM435mil), Bandar Puteri Puchong (RM369mil) and Warisan Puteri Sepang (RM213mil).
  
  (iii) Despite rising building material costs as a result of supply chain disruptions, IOIPG’s margin is projected to be less impacted as most materials for its existing projects were secured in advance at lower prices. For new projects, IOIPG incorporated a new business unit to buy building materials in bulk to mitigate the impact of heightened cost.
  
  (iv) The construction of IOI City Mall Phase 2 is 78% completed. The mall is on track to open in June/July 2022. We understand that the mall’s committed occupancy is more than 70%, including anchor tenants such as AEON and GSC. We estimate FY23F gross rental from Phase 2 at RM27mil to RM36mil, assuming a 75% occupancy level.
  
  (iv) The construction of Central Boulevard in Singapore’s Grade A Green Mark Platinum office towers is scheduled to be completed by 1HFY24. We estimate Central Boulevard to generate annual gross rental of RM32mil to RM38mil from FY24F with the assumption of 80% occupancy due to its prime location in the central business district.
   
• The stock currently trades at a bargain FY23F PE of only 7x vs. a 4-year average of 11x and offers a fair dividend yield of 2%. We continue to like IOIPG for:
  
  1) Its strong proxy to China which accounts for 40% of FY21 total sales;
  
  2) Regional property development with a strong track record and successful real estate projects in Malaysia, Singapore (Sentosa Cove) and China (Xiamen); and
  
  3) Its resilient earnings amid a prolonged property sector downturn underpinned by recurring sales from predominantly owner-occupier home buyers in established and highly sought-after township projects, particularly, Bandar Puteri Puchong and Bandar Puchong Jaya.
   
• The downside risk will be the potential surge in Covid cases in Xiamen, China which may lead to city-wide lockdowns under China’s zero-Covid policy.

Source: AmInvest Research - 30 Mar 2022