IOIPG : Pending breakout

Looking past the net gearing concern. We maintain our conviction BUY call on IOIPG and believe the recent share price weakness presents a good opportunity for investors to accumulate. To recap, IOIPG’s share price came under pressure as the market raised concerns about its net gearing level after a series of acquisitions. However, we believe this elevated gearing level is likely temporary and could lower going forward. Firstly, we highlight that its net gearing level appears to be high partly due to the strength in SGD. Given that around 80% of debt is in SGD, when this was translated to ringgit terms, it swelled to a large sum, magnified by the exchange rate impact. As the ringgit strengthens, this effect should reverse, resulting in a lower net gearing level. Secondly, we anticipate another round of revaluation gain in 4QFY25, which could further reduce the gearing.

It is worth noting that net gearing is just a metric that shows the debt level that a group has; it doesn't fully capture the company’s ability to repay that debt. More importantly is that the group’s average interest rate is expected to go below 4% following Fed’s rate cut, while from a cash flow perspective, we expect substantial improvement as new revenue streams from IOI Central Boulevard and other assets come online. Thus we see minimal credit risk, underpinned by its stable recurring income, strong asset quality, growing revenue streams, and lower interest costs.

Strong earnings trajectory with undemanding valuation. We project IOIPG’s net profit to achieve a strong CAGR of 19% from FY23 to FY26f. We reckon IOIPG is now at the cusp of unleashing significant value from its jewel assets in Singapore namely IOI Central Boulevard and Marina View Residences. The stock remains deeply undervalued, especially considering that its property investment and hotel assets alone are worth more than twice its current market capitalization, without even factoring in the value of its landbank.

Pending breakout. After recovering 18% from Black Monday’s low of RM1.83 to RM2.16 yesterday, IOIPG is now pending for a breakout above its short-term resistance region of RM2.18–2.20. A successful breakout above the said hurdle will spur greater upside toward RM2.35-2.43-2.51 levels. Cut loss at RM1.98.

Collection range: RM2.05-2.09-2.16

Upside targets: RM2.35-2.43-2.51

Cut loss: RM1.98

Source: Hong Leong Investment Bank Research - 2 Oct 2024