Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with a lower fair value of RM1.52/share from RM1.55/share based on a 55% discount to its revised RNAV and a neutral ESG rating of 3 stars (Exhibits 6 & 7). The lower valuation stems from lower FY23F–24F earnings due to higher effective tax rate assumptions.

• IOIPG’s FY22 core net profit (CNP) of RM702mil came in within our and consensus’ FY22F earnings, at 1% above our FY22F earnings and 1% below consensus estimate. We lower our FY23F/FY24F earnings by 4%/7% to reflect an increase in the effective tax rate to 32%/34% from 25%. Nevertheless, the 32%–34% effective tax rate is still lower than the 38% in FY21–22 due to the expectation of lower property sales from China (which carried a higher tax rate) in view of the country’s softening property market.
  We also take the opportunity to introduce our FY25F earnings with a growth of 10% on expectations of a pickup in launches.

• In FY22, IOIPG’s revenue rose 4% YoY, which was mainly supported by stronger contribution from its property investment (+27% YoY) and leisure (+35% YoY) segment. Higher growth from these segments was backed by new rental income from IOI’s Mall in Xiamen beginning October 2021 as well as a recovery in the Malaysian mall operations and hospitality/leisure segment arising from relaxation of travel restrictions together with the opening of international borders.
  However, CNP dropped 12% YoY, mainly due to the nonrecurring one-off gain arising from a sale of land of its associate and reversal of inventories written down for Cape Royale in Singapore in FY21.

• YoY, the group’s FY22 property development revenue was flattish at RM2.1bil while operating profit rose 14% YoY, driven by higher sales of commercial properties in Malaysian operations and higher profit contribution from IOI Palm City, Xiamen.

• Year to date, IOIPG has secured FY22 new sales of RM1.9bil (-16% YoY), attaining 92% of its FY22F sales target of RM2.1bil (Exhibit 3). New sales were contributed largely by Malaysia (77%) with the remainder (23%) China.

• The lower sales YoY were attributed to slower FY22 launches of RM1.3bil vs. RM1.9bil in FY21. In 4QFY22, IOIPG launched properties worth RM142mil in Malaysia, where 92% of stemmed from the Warisan Puteri township in Sepang.

• Meanwhile, the group’s unbilled sales dropped 25% YoY to RM605mil, which represented a cover ratio of only 0.2x of FY23F revenue. Despite the low cover ratio, we believe IOIPG’s FY23F revenue and CNP are mainly supported by the group’s efforts to monetise its inventory. Despite a declining trend over the past 3 quarters, we saw IOIPG’s inventory climbing 49% QoQ to RM3.1bil as more projects were completed in 4QFY22 (Exhibit 4).

• QoQ, the group’s 4QFY22 CNP improved 11%, mainly due to lower tax expenses (-36% QoQ). The lower effective tax rate of 25% in 4QFY22 vs. 72% in 3QFY22 was mainly attributed to weaker sales exposure from China (which carried a higher tax rate) in 4QFY22. Notably, IOIPG’s business in China is subject to a 25% corporate tax and land appreciation tax ranges from 30% to 60% based on the appreciated value upon the sales of landed properties.

• We are concerned about the sales of IOIPG’s ongoing projects in China given the 32% YoY slump in China’s property sales for January–June 2022. In August 2022, the People’s Bank of China lowered the 5-year loan prime rate (LPR) by 0.15% to 4.30% and the one-year LPR to 3.65% from 3.70% to boost the property market (Exhibit 5). Notably, the 1- year LPR serves as the reference rate for the majority of the new loans in China. Although the easing of monetary policy may provide near-term relief to homebuyers, 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 its:
  1) regional property development with a strong track record and successful real estate projects in Malaysia, Singapore (Sentosa Cove) and China (Xiamen); and
  2) 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.

Source: AmInvest Research - 23 Aug 2022