News  Proposed renounceable rights issue on the basis of 1 (1) rights share for every 6 (6) IOIPG shares held at a fixed issue price of RM1.90 (28% discount to the TEAP of RM2.64). The group is also establishing an ESOS scheme (up to 10% of share capital) as well. The exercises are expected to be completed in 1QCY15.

Comments  The rights issuance will raise RM1.03b in proceeds and will increase its share base by 17% to 3.78b shares (before ESOS conversions).

 Rationale for the cash call is mainly for its investment property CAPEX, working capital and “investment opportunities” (refer overleaf).

 We were taken by surprise by the cash call. While cognisant of their heavy CAPEX commitments, we had previously assumed that it will take place gradually over a 3-5 year period and would be driven by operating cashflow and borrowings, particularly as they have a low net gearing of 0.15x in 4Q14. Assuming a maximum net gearing of 0.50x, the group would have been able to raise some RM3.9b worth of funds. However, we gather that IOIPG rather not tax its balance sheet as much of it will be used to fund CAPEX of investment properties which does not generate the same payback period as the property development. Furthermore, we dare venture to say that the company is readying funds for future overseas or local landbanking, particularly when times appear to be challenging globally. We are NEUTRAL on the deal because it does not translate to near term excitements while new landbanking is unlikely to significantly add to IOIPG’s valuation considering its massive GDV base while the stock is already trading at a peak 55% discount to its RNAV.

 Post-exercise, our FY15E net gearing will be lowered to 0.21x from 0.23x after taking into account the CAPEX spent.

Outlook  The Bangi township project will likely be launched by 2H15 and its first phase will feature double-storey terraces and shoplots. IOI City Mall, Putrajaya will be completed by year end and we gather that most of the retail spaces have been rented out.

Forecast  No changes to FY14-15E estimates.

Rating Maintain OUTPERFORM

Valuation  The exercise will reduce our FD RNAV by 5% to RM5.31. However, we rather maintain our TP of RM3.10, which implies a narrower RNAV discount of 42% (45% previously). The applied RNAV discount is inline with our sector average of 41%. We believe that the company may be looking to acquire new assets in the next 12 months. Also, IOIPG is a sector laggard, which has surprised the market with dividends, while earnings disappointments are less likely considering that we have trimmed earnings in the last 3 consecutive quarters.

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

Source: Kenanga