Period  2Q14 / 1H14

Actual vs. Expectations IOI Properties’ (IOIPG) 1H14 core net profit of RM222.3m came in below our estimate and street’s consensus, making up only 31% and 42% of full year estimates, respectively. We believe that the weak performance was primarily due to: (i) slower-than expected sales and recognition from its local and overseas project (i.e. China) and (ii) lower-than expected contribution from its property investment and leisure and hospitality segment as we had anticipated IOI City Mall Putrajaya and PFCC Tower 4 & 5 to commence operations in early FY14.

 1H14 property sales of only RM1.1b was also below expectation as it made-up 42% of our sales projection of RM2.6b.

Dividends  No dividend was declared, as expected.

Key Results Highlights QoQ, 2Q14 reported net profit of RM300m which included a one-off gain from the acquisition of a subsidiary amounting to RM198m. Minus this gain, core earnings actually dipped 2% to RM109.9m despite a revenue growth of 21%. The revenue growth was supported by its property division, which saw a 22% improvement in revenue due to better contribution from its local operations and China projects in Xiamen. However, its operating margin saw a dip by 1.5ppt to 39.7%. Meanwhile, its property investment division revenue fell by 24% to RM20.6m, but saw a 9.7ppt increase in operating margin from 63% to 72.7%.

 Another culprit that dragged down its core earnings was the sharp decline (-61%) in its associate/JCE contributions, which decreased from RM24.8m to RM9.8m, coupled with an increase in minority interest.

Outlook  Despite the property cooling measures, IOIPG would still enjoy resilient demand driven by its exposure in township developments in Malaysia. These “bread and butter” townships are mainly focused on landed residentials with excellent accessibility to highways and rail systems and focused on the genuine owner occupiers in the affordable and upgraders’ market.

 Their biggest overseas contributor over the next few years will be IOI Park Bay in Xiamen, China which has achieved 100% take-up rate for Phase 1 (GDV: RM400m) and has just chalked up 40% of its total sales of RM1.1b in 1H14.

Change to Forecasts Lower FY14-15E earnings by 19%-12% because: (i) we lowered sales projections to RM2.2b (-15%) - RM2.6b (-18%) due to weaker-than-expected 1H14 performance and (ii) lowered our property investment and leisure & hospitality division contribution in FY14 by 42% and 30%, respectively, as we expect IOI City Mall, Putrajaya and PFCC Tower 4 & 5 to contribute more meaningfully only from FY15 onwards. Unbilled sales of RM1.0b provide at least one-year visibility.

Rating Maintain OUTPERFORM

 We still like IOIPG for its high exposure to township landbanks and low landbank costs, which enable them to earn more for each ringgit earned and provide them diversity from concentrated geographical risks.

Valuation  Maintaining our TP at RM3.68 (35% discount to its FD RNAV of RM5.67, DCF @ 11% WACC).

Risks to Our Call  Failure to meet sales targets or replenish landbank.

Sector risks, including overly negative policies.

Source: Kenanga