News

• Proposed a renounceable right issue of up to 1.11bn new shares at an issue price of RM1.38 per share on the basis of (1) share for every (4) shares.

• The issue price of RM1.38 represents a discount of approximately 36% discount to theoretical ex-rights price of RM2.14.

• This is expected to raise about RM1.52bn and would be used to repay borrowing and fund the purchase of land in Marina Bay. The deal is expected to be completed in 1Q2017.

• To recap, IOIPG has successfully tendered for a parcel of 2.7 acres of prime leasehold land at Marina Bay, Singapore for SGD2.56bn (or RM7.77bn). We estimate the GDV for this project at SGD5.1bn (or RM15.4bn) based on assumption of land cost at 50% of total GDV

Financial Impact

• With the proposed right issue, we expect earnings dilution in near term with FY17 and FY18 EPS to be diluted by 20% and 17% respectively. RNAV/share will also be reduced by 8% even after factoring in the NPV for land in Marina Bay.

Pros/Cons

• We are not surprised by the proposed right issue given the sizeable acquisition of land in Marina Bay which would put pressure on its balance sheet.

• With the proposed right issue, net gearing will be reduced from 0.70x to 0.61x, a more manageable level.

• We are negative on the short term given the dilution of EPS and RNAV per share.

• In the long run, we are positive on the acquisition of Marina Bay’s land given its prime land status for office development in Singapore. This is also in line with company target’s to grow its investment income from current 20% to 40% in the future.

• With the development period of 7 years, the acquisition could be timely as this could potential capture the rebound in office segment.

Forecast

• FY17, FY18 and FY19 EPS are reduced by 20%, 17% and 11% respectively after factoring in the dilution impact and launching of Marina Bay’s land in FY18.

Rating

• HOLD

• We downgrade the stock from BUY to HOLD due to the concern on immediate EPS dilution and subdued sentiments for property outlook in Singapore and Malaysia.

Valuation

• TP is reduced from RM2.77 to RM2.54 (based on unchanged 35% discount) post lower RNAV of RM3.90 (versus RM4.26 previously).

Source: Hong Leong Investment Bank Research - 21 Nov 2016