Higher Gearing on the Cards

After its unsuccessful JV with HKLI on the Central Boulevard project, IOIPG plans to continue to consolidate and finance the project itself. Its gearing should rise to 0.57x as construction work on the project has started. IOIPG plans for construction costs of SGD700-800m, in addition to the high land cost of SGD2.57bn. We leave our earnings and RNAV unchanged. However, given a higher risk profile we lift our RNAV discount to 50% (from 40%), which lowers our TP to RM1.78. Maintain HOLD.

Unsuccessful JV

IOIPG has terminated the proposed joint venture (JV) between its whollyowned unit Wealthy Link Pte Ltd and Hongkong Land International Holdings Limited (HKLI) to jointly own, develop and manage the Central Boulevard land in Singapore. We gather that both parties were unable to agree on construction planning (CP) within the 9-month time frame when it was first proposed on 12 March 2017.

No Impact on Our Earnings, But Potential Upside in Asset Revaluation

Given that the JV has been terminated, future earnings from the investment property will not be shared. As we assume interest expenses will be capitalized, there is no immediate impact on our earnings. We have not assumed any earnings contribution and RNAV enhancement from the Central Boulevard project in our model due to the execution risk and long gestation period for the project. However, IOIPG will likely see a higher asset value for Central Boulevard on completion in 7 years’ time.

Higher Net Gearing

However, the downside is that IOIPG will have to continue to consolidate and finance the project itself after the JV deal fell through. According to management, the Central Boulevard’s construction cost is SGD700-800m. Hence, we expect the group’s net gearing to increase to 0.57x (2Q FY18: 0.55x) given the need to finance the construction costs.

Maintain HOLD With a Lower TP of RM1.78

We maintain our HOLD rating with a lower 12-month TP of RM1.78 (from RM2.26) as we widen our RNAV discount to 50% (from 40%) to reflect the higher development risk for the Central Boulevard project. We adjust the net debt in our RNAV estimate to reflect the latest audited figure (as at 30 June 2017). Key upside/downside risks would be stronger/weaker property sales and a recovery/prolonged downturn in the domestic property market.

Source: Affin Hwang Research - 23 Mar 2018