Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with a higher fair value of RM1.91/share (from RM1.42/share previously) based on a lower discount rate of 45% (from 55% previously) to our rolled-forward RNAV-based valuation and neutral ESG rating of 3 stars (Exhibits 12 & 13). Our FV implies a FY25F PE of 12x, 1 standard deviation above its 3- year median.

• The lower discount rate stems from improving sentiments in overall property market in Malaysia with the anticipation of revival of mega infrastructure projects and the potential relaxation of the conditions for Malaysia My Second Home (MM2H) program.

• IOIPG’s FY23 core net profit (CNP) of RM640mil was below expectations, making up 85% of our earlier FY23F earnings and 84% of street’s.

• The variance to our forecast was mainly due to weaker-thanexpected sales recovery in its China project.

• Hence, we lower our FY24F core net profit (CNP) by 7% after accounting for slower-than-expected recovery in the sales of its China property. Nevertheless, we expect FY25F revenue and CNP to pick up with contribution from upcoming launches of Marina View Residences in Singapore with a huge gross development value (GDV) of RM8.5bil.

• We also take the opportunity to introduce FY26F earnings with a CNP growth of 11% on expectation of the pick-up of new launches and higher revenue recognition from Marina View Residences in Singapore.

• YoY, the group’s FY23 revenue was flattish at RM2.6bil while CNP fell 9%. This was mainly attributed to weaker contribution from property development (-11% YoY) (Exhibit 2). The decline was due to lower sales contribution from China (-45% YoY).

• In FY23, IOIPG secured new sales of RM2bil (+2% YoY), exceeding its FY23F sales target of RM1.8bil (Exhibit 3). New sales were contributed largely by Malaysia (85%), with the remainder from China (13%) and Singapore (2%). This comprised of residential high rise (45%), residential landed (32%) and commercial (23%) properties.

• Meanwhile, the group’s unbilled sales improved 12% QoQ to RM623mil, which represented a cover ratio of only 0.3x of FY24F property development revenue.

• Despite the low unbilled sales cover ratio, we believe IOIPG’s FY24F revenue and CNP will be mainly supported by the group’s efforts to monetise its existing inventory of RM2.4bil (Exhibit 4). Notably, 49% of its inventories are from overseas (China and Singapore) with the remainder (51%) from Malaysia. IOIPG’s FY23 completed inventories declined 21% YoY, with the majority of reduction from its Johor projects.

• In FY23, IOIPG launched RM1.2bil (-8% YoY) worth of properties in Malaysia (88%) and China (12%), with an average take-up rate of 69% (Exhibits 5 & 6).

• In FY24F, IOIPG plans to ramp up launches to RM10bil (8x from FY23 actual launch) with the major projects being Marina View Residences in Singapore (GDV: RM8.5bil) (Exhibit 7). We anticipate Marina View Residences to be launched in October 2023 and contribute positively to IOIPG from FY24F-FY28F.

• While there is no guidance on FY24F sales target, we anticipate IOIPG’s FY24F sales to be ranging from RM4bil-5bil (from RM2bil of actual sales in FY23), boosted by continuous monetisation of inventories and an assumption of 30%- 40% take-up rate for its Marina View Residence project.

• However, we are concerned about the sales of IOIPG’s ongoing projects in China given the 6% YoY decline in China’s overall property sales for January–June 2023. Moreover, in July 2023, the China house price index has experienced its first MoM drop (-0.2%) in 2023 given weakening property demand (Exhibit 11).

• To support the recovery in property market, the Chinese government unveiled a rescue package to salvage its housing market in November 2022 (Exhibit 10). Meanwhile, the People’s Bank of China lowered its 1-year loan prime rate by 0.1% to 3.45% in August 2023 to boost the property market (Exhibit 9). Notably, the 1-year LPR serves as the reference rate for the majority of new loans in China. Although the easing of monetary policy and introduction of supportive measures for property sector may provide near-term relief to homebuyers, we remain cautious on China’s property market due to still-fragile demand.

• QoQ, the group’s 4QFY23 CNP dropped 7% despite an 18% increase in revenue. This was mainly due to weaker performances from its hospitality and leisure segment (operating loss of RM24mil in 4QFY23 vs. RM2mil in 3QFY23) given the higher cost of labour and increase in electricity tariff under the Imbalance Cost Pass Through (ICPT) mechanism and provision of Liquidated Ascertained Damages (LAD) payable to the land authority for the delay in completion of Xiamen Sheraton Grand Hotel.

• Nevertheless, the stock currently trades at a bargain FY25F PE of only 10x vs. its 3-year median of 12x. 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 - 29 Aug 2023