Period  3Q14/9M14

Actual vs. Expectations IOI Properties (IOIP)’s 9M14 core earnings of RM302m came in below expectations, making up 55% of street FY14E estimates and 52% of ours. This was largely due to steeper-than-expected development margin contractions and softer property billings.

 9M14 sales of RM1.5b was also below expectations as it made up only 68% of our FY14E target of RM2.2b. 3Q14 sales of RM0.4b (-27% QoQ) was driven by its Malaysian and Xiamen, China projects. Its sales from China improved on a QoQ basis, but Malaysian sales saw a decline due to slower take-ups and fewer new launches as the company was cautious post Budget-2014 measures.

Dividends  None, as expected.

Key Results Highlights QoQ, 3Q14 core earnings was 13% lower on the back of a 9% decline in group revenue. This was due to softer billings observed by its development division, lower by 7% due to lack of new launches in the last two quarters. Group EBIT margins compressed by 14.2ppt to 31.3% and the major culprit was its development margins as the company saw more billings from the Xiamen, China projects which carry lower margins vs. its Malaysian projects. Its property investment EBIT improved slightly by 17% but was not sufficient to negate overall impact as development is still the major driver (80% of group EBIT).

 Its net gearing has increased to 0.11x from 0.01x largely due to the repayment of intercompany borrowings arising from the demerger exercise.

 Note that there are no YoY comparative figures.

Outlook  Their IOI City Mall, Putrajaya will be completed by Dec-14 and so far, 80% of the space has been tenanted.

 The group remains cautious on the Malaysian property outlook but believes that 2HCY14 will see stronger sales momentum due to pre-GST demand.

Change to Forecasts Lowering FY14-15E core earnings by 23%-17% as we reduce our FY14-15E sales by 9%-15% to RM2.0b-RM2.2b and trim our development margins to account for more contributions from its China projects. Unbilled sales of RM1.2b provide less than 1 year visibility.

Rating Maintain OUTPERFORM

Valuation  Our TP is lowered to RM3.08 from RM3.25 based on a wider FD RNAV discount of 45% from 42% to its FD RNAV of RM5.60. This is to account for the 2 consecutive quarters of disappointing earnings. However, the stock remains as OUTPERFORM as (i) our applied discount rate is line with large cap developers like UEMS and SPSETIA and (ii) although earnings results were disappointing so far, we believe a lot of negatives has been priced-in and we opine that take-up rates will pick up in 2HCY14.

Risks to Our Call Failure to meet sales targets. Sector risks, including overly negative policies.

Source: Kenanga