IOI Properties’ (IOIPG) net profit grew 3% yoy to RM336m in 1HFY20, driven by lower unrealised forex losses and effective tax rate. Core net profit of RM364m (+2% yoy) in 1HFY20 was above our expectation. However, we maintain our FY20E earnings given risks of slower sales, especially for its China operation due to the Covid-19 virus outbreak. FY20E PER of 9x and PBR of 0.3x are attractive and IOIPG remains our top sector BUY with a TP of RM1.82, based on a 50% discount to RNAV.

Core Net Profit Above Expectation

IOIPG’s net profit of RM336m (+3% yoy) in 1HFY20 comprises 50-51% of the consensus and our full-year forecasts of RM657-668m. There was an unrealised forex loss of RM27m in 1HFY20 on translation of its US$- denominated loans compared to RM32m in 1HFY19. Core net profit was up 2% yoy to RM364m in 1HFY20 (55% of FY20E earnings), driven by a lower effective tax rate (37.7% in 1HFY20 vs 41.2% in 1HFY19) due to the lower contribution from China operations (higher tax rate compared to Malaysia). 2QFY20 net profit jumped 46% qoq to RM200m, mainly due to unrealised forex gains and a lower tax rate. 2QFY20 core net profit fell 7% qoq to RM175m, mainly due to a lower EBITDA margin (40.8% in 2QFY20 compared to 45.1% in 2QFY19).

Lower Revenue But Better Profit Margin

Revenue fell 9% yoy to RM1.1bn in 1HFY20 due to lower sales and slower progress billings, with a lower revenue contribution from its Singapore operation as its Trilinq condominium project has been completed, with few units remaining for sale. EBIT fell 9% yoy to RM463m in 1HFY20, due to lower property development earnings, partly offset by higher property investment earnings. Its joint-venture earnings contribution increased 72% yoy to RM79m in 1HFY20, mainly from its South Beach Residences project in Singapore.

Lower Sales

IOIPG achieved lower sales of RM876m in 1HFY20 compared to RM1,036m in 1HFY19 due to fewer new launches and a focus on selling inventories. Unbilled sales of RM742m and potential sale of inventories of RM2.21bn as at 31 December 2019 will likely sustain revenue in FY20-21E.

Top Sector BUY

IOIPG remains our top sector BUY with an unchanged 12-month target price of RM1.82, based on a 50% discount to our RNAV/share estimate of RM3.64. Key downside risk: prolonged local property market weakness and Covid-19 impact on China sales.

Source: Affin Hwang Research - 26 Feb 2020