Initiating coverage on IOIPG with an OUTPERFORM recommendation and TP of RM3.68 based on a 35% discount to its FD RNAV of RM5.67. IOIPG is the largest listed classified developer, boasting some 14,000 ac of landbank which we estimate has a potential GDV of c.RM100b. We also like it for these attributes: (i) it is the second largest developer by market cap of RM8.1b, behind UEMS, (ii) deep value in terms of its GDV/market cap ratio of 12.6x vs. big-cap peers of 9.3x, (iii) highest margins amongst large cap developers owing to its lower land cost, (iv) huge township exposure which tends to target genuine home buyers, and (v) strong balance sheet to build up a strong base in the investment property division which could be spun off in the future. At its IPO price, the stock will be trading at 11.3x-10.1x FY14-15E core PERs and very low Fwd PBV of 0.7x vs. its peers’ 11.9x-10.4x and 1.2x. At our TP, IOIPG will be trading at FY14-15E core PER of 16.6x-14.8x and Fwd PBV of 1.1x which are premium levels compared to its big-cap peers, but more on par with the likes of UEMS and SPSETIA.

Largest listed developer by landbank and second largest by market cap. The group owns a remaining landbank of 14,337 ac, which includes lands located in Johor, Klang Valley, Melaka, Negeri Sembilan and Penang while its overseas exposures includes Xiamen, China and Singapore. With its market cap of RM8.1b, IOIPG is the second largest listed developer in Malaysia by market cap, meaning high visibility, as well as premium valuations. There is also a high likelihood that the stock may qualify as a Shariah compliant counter in the next Jun-2014 review.

Deep value in terms of GDV/market cap ratio. We estimate a total GDV of c.RM100b for IOIPG, which puts it on par with SPSETIA and 28% higher than UEMS. This implies GDV/market cap ratio of 12.6x, just trailing behind SPSETIA, which has the best ratio of 14.3x but more than its big-cap peers’ average of 9.3x. If IOIPG trades at its big-cap peers’ average, its implied market cap would be RM11.0b or 35% higher than its IPO market cap.

Resilient demand from townships exposure. In Malaysia, the group’s main drivers are its townships (e.g. Bandar Puteri@Puchong, 16 Sierra @ South Puchong, Bandar Putra Kulai @ Kulaijaya). These townships are mainly focused on landed residentials with strong accessibility to rail systems and highways. Their markets tend to focus on genuine owner-occupiers in the affordable and upgraders market, which should see resilient demand even during tough market cycles. Their biggest overseas contributor over the next few years will be IOI Park Bay, Xiamen, China, which has achieved 100% take-up rate for Phase 1 (GDV: RM400m).

Working less for each ringgit earned. IOIPG has enjoyed strong gross profit margin of 57%-61% over the last 3 years vs. its peers’ 18%-40%. This is attributable to its lower landbank costs, coupled with strong and reputable branding, which allows the group to price its product at a premium.

Building a war chest of investment properties. At IPO, IOIPG is in a very comfortable net gearing level of 0.05x with no immediate need to acquire more land given its ample war chest of land, which should sustain the company beyond 10 years. However, the group willexpand its investment properties for more recurring income and we estimate that they will spend RM2.5b CAPEX over the next two years while FY14-15E net gearings will remain below the healthy 0.2x mark. There is a possibility that the company may explore monetisation of their investment properties in the future.

Estimating FY14-15E core earnings of RM0.72b-RM0.81b (33%-12% YoY). This is based on sales assumptions of RM2.6b-RM3.1b (52%-21% YoY) vs. management’s guidance of RM2.5b-RM3.0b p.a. for the next 3 years which implies very low take-up rates of 42%-50% against its 3-year launch target of RM18b (56% Malaysia; 28% Xiamen, China; 16% Singapore).

Source: Kenanga