IOI Properties’ (IOIPG) FY19 result was below expectations. Net profit eased 12% yoy to RM661m in FY19 on a higher tax rate. Core net profit grew 7% yoy driven by improved profit margin despite lower revenue. We cut our core EPS forecasts by 11-20% in FY20-21E to reflect lower revenue and higher tax rate. Attractive FY20E PER of 10x and Price/book of 0.3x. IOIPG is our top sector BUY call with slightly lower target price (TP) of RM1.82, based on 50% discount to RNAV. IOIPG cut DPS to 3 sen in FY19 from 5 sen in FY18 to preserve cash for property investment.

Above Our Expectation

IOIPG’s reported net profit of RM661m (-12% yoy) in FY19 was 9% below market consensus and our forecasts of RM726-728m. Its new Xiamen Phase 3 mixed development project launch was delayed to July 2019 and hence did not contribute to 4QFY19 earnings. Revenue fell 18% yoy to RM2.2bn due to lower revenue contribution from Singapore as its Trilinq condominium project in Singapore is at the tail end. There was also lower progress billings for its ongoing Malaysian property development projects. For similar reasons, revenue fell 26% yoy but was up 2% qoq to RM498m in 4QFY19.

Higher EBIT Growth and Margin

EBIT increased 6% yoy to RM848m due to higher profit margin on completed unit sales and higher contribution from its projects in China. EBIT margin increased 8.6 ppt yoy to 38.6% in FY19. The surge in Joint Venture (JV) earnings to RM105m from a loss of RM31m boosted its PBT by 7% yoy to RM858m in FY19 despite lower net exceptional and forex gain (-67% yoy). IOIPG achieved sales of RM1.93bn in FY19 with highest contribution from its Malaysian operation at 58% of total sales. China operation contributed 39% of total sales, while Singapore operation contributed the remaining 3%. This was a 3% yoy increase from the RM1.88bn sales achieved in FY18. IOIPG is targeting to sustain the sales momentum in FY20 with the launch of properties worth RMB2.9bn for its Xiamen Phase 3 project in the coming financial year.

Added to Top Sector BUY

We add IOIPG to our top sector BUYs as we believe the 11% share price correction is a buying opportunity. Valuations are attractive at current Price/Book of 0.3x and FY20E PER of 10x. We trim our RNAV/share estimate to RM3.64 from RM3.66 to reflect higher net debt. Based on the same 50% discount to RNAV, we trim our TP to RM1.82 from RM1.83. Key downside risk is the prolonged local property market weakness.

Source: Affin Hwang Research - 30 Aug 2019