Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with a lower fair value of RM1.55/share from RM1.76/share based on a revised RNAV valuation. Our fair value is based on a 55% discount to its RNAV and a neutral ESG rating of 3 stars (Exhibits 4 & 5). The higher discount (vs. 50% previously) is to reflect the current weak sentiment in China’s property market. Additionally, the lower valuation also stems from a 4% increase in net debt partially offset by higher valuation for its investment properties.

• IOIPG’s 9MFY22 core net profit (CNP) of RM514mil came in within our expectations, making up 74% of our FY22F earnings and accounting for 73% of consensus estimate. Thus, we make no changes to our forecast.

• In 3QFY22, the group’s property development segment’s revenue surged by 25% YoY, driven by further progress works from ongoing projects and higher number of vacant possession of completed projects following the lifting of movement restriction orders. The segment’s operating profit rose by 45% YoY in the quarter.

• Year to date, IOIPG secured new sales of RM1.3bil (-16% YoY), attaining 62% of its FY22F sales target of RM2.1bil. New sales were contributed largely by Malaysia (73%) with the remainder (27%) by China. (Exhibit 3).

• The lower sales YoY were attributed to slower 3QFY22 launches of RM62mil vs. 1HFY22’s RM1.1bil. The group needs to launch RM800–900mil of new properties in 4QFY22 to meet its new sales target for the financial year. We see this as challenging because the group could scale back new launches due to the recent softening property market.

• Meanwhile, the group’s unbilled sales dropped 16% YoY to RM537mil, which represented a cover ratio of 0.3x of FY22F revenue. Despite the low cover ratio, we believe IOIPG’s FY22F revenue and CNP are mainly supported by its inventory monetisation effort. We observed a declining trend on IOIPG’s inventory level, with a 15% YoY decline to RM2.1bil.

• 4QFY22 new launches will comprise mainly Malaysia's existing townships, including 16 Sierra, Warisan Puteri Sepang and Bandar Putra Kulai.

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  The property investment segment’s 3QFY22 operating profit expanded 48% YoY backed by new rental income from IOI’s Mall in Xiamen beginning October 2021 and lower rental rebates given to tenants of malls operated in Malaysia.

• 3QFY22 operating loss from the leisure segment narrowed 1% YoY due to lower operating expenses helped by wage subsidy and electricity rebates.

• QoQ, the group’s 3QFY22 CNP improved 20% due to a strong improvement in the property development segment as a result of improved progress works. However, this was mitigated by weaker operating profits from property investment, hospitality & leisure and other segments.

• China, particularly Xiamen, is IOIPG’s major market, accounting for 30% of total sales in FY22F. We are concerned about the sales of IOIPG’s ongoing projects in China given the 29.5% YoY slump in China’s property sales for the period of January–April 2022. In May 2022, the People’s Bank of China lowered the five-year loan prime rate by 0.15% to 4.45% in May 2022 to boost the property market. However, we remain cautious on China’s property market due to tighter Covid-19 curbs and still fragile demand.

• The stock currently trades at a bargain FY23F PE of only 7x vs. a 4-year average of 11x. We continue to like IOIPG for: 1) its regional property development with a strong track record and successful real estate projects in Malaysia, Singapore (Sentosa Cove) and China (Xiamen); and 2) 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 - 26 May 2022