Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with an unchanged fair value of RM1.42/share based on a discount rate of 60% to our RNAV and a neutral ESG rating of 3 stars (Exhibits 7 & 8). Our FV implies a FY24F PE of 10x, at parity to its 3-year median.

• We make no changes to our earnings forecast as IOIPG’s 1HFY23 core net profit (CNP) of RM418mil was generally within expectations, making up 55% of our FY23F earnings and consensus estimate.

• YoY, the group’s 1HFY23 revenue rose 20%, which supported the CNP increase of 22%. This was mainly attributed to stronger contribution from property investment (+52% YoY) (Exhibit 2). The improvement was due to the commencement of recurring lease income from IOI City Mall Phase 2 on 25 August 2022.

• In 1HFY23, IOIPG secured new sales of RM927mil (+3% YoY), attaining 44% of its FY23F sales target of RM2.1bil (Exhibit 3). New sales were contributed largely by Malaysia (86%), with the remainder from China (11%) and Singapore (3%).

• In Malaysia, 59% of local sales came from Klang Valley area, with the major contributors being IOI Resort City in Putrajaya and Bandar Puteri Puchong in Selangor. Meanwhile, Johor accounted for 38% of local sales, led by Bandar Putra Kulai and Taman Kempas Utama.

• Meanwhile, the group’s unbilled sales dropped 2% QoQ to RM489mil, 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 will be mainly supported by the group’s efforts to monetise its existing inventory (Exhibit 4). Notably, 46% of its inventories are from China with the remainder (54%) from Malaysia.

• Before China’s reopening in January 2023, the property sector was severely impacted by its strict zero-Covid policy. This has impacted IOIPG’s property sales and planned launches in China for the past 1 year. However, given the support of China’s government for the property sector and easing of monetary policy, we believe there will be renewed interest for property purchase in China after 3 years of restricted movement.

• In November 2022, the Chinese government unveiled a rescue package to salvage its housing market (Exhibit 6). China’s supportive measures for the property sector has resulted in a halt in price decline for new homes in January 2023 after decreasing for 16 months starting on August 2021.

• To support the recovery in property market, the People’s Bank of China has maintained its 5-year loan prime rate (LPR) and 1-year LPR after the last cut in August 2022 (Exhibit 5). Market consensus expects no change to either rates in 1HCY23.

• Additionally, household savings at banks in China surged by RMB18tril (+80% YoY) in 2022. Meanwhile, the excess savings among Chinese consumers stood at RMB6tril at the end of 2022. This is envisaged to support the recovery in consumption, including demand for houses in 2023.

• IOIPG’s inventory level has fallen by 15% since the end of June 2022. However, its inventory level is still high at RM2.6bil. Hence, we believe that IOIPG will focus more on clearing its inventory than lauching new properties. Over the past few months, IOIPG launched various campaigns, including “IOI Buy with Tenant” and “101 Happy Moments” to promote its commercial properties and townships in Malaysia.

• QoQ, the group’s 2QFY23 CNP improved 8%, mainly due to improved performances from its property investment and hospitality & leisure segments. These were boosted by the increase in shopping footfalls and tourist arrivals brought on by the lifting of travel and social restrictions.

• The stock currently trades at a bargain FY24F PE of only 8x vs. a 4-year average of 11x. We continue to like IOIPG for its: 1) regional property development portfolio 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 - 27 Feb 2023