Period  2Q15/1H15

Actual vs. Expectations  1H15 core earnings of RM203m came below expectations, making-up 39% of both consensus and our full-year estimates. The major disappointment was due to lower-thanexpected development margins on the back of higher A&P costs. This is the 4th consecutive quarter where IOIPG has missed market expectations.

 Sales for 1H15 amounted to RM638m which is proportionately behind our RM2.0b target for FY15. Composition of 1H15 sales are: 86% from Malaysia, 7% from China and 7% from Singapore.

Dividends  None, as expected.

Key Results Highlights  QoQ, reported PATAMI was up by 178% due to RM178m worth of FV adjustments arising from the completion of IOI City Mall which commenced on 20/11/14. Stripping this out, core earnings was marginally up (+1%). Although revenue rose by 19% on higher property billings (+26%) and IOI City Mall’s maiden contributions to property investment income (+47%), we note that EBIT margins softened by 2.2ppt on higher A&P costs while share of JCE turned into the red at RM5m (vs. RM7m profit in 1Q15) which we reckon could be due to its Singapore projects.

 YoY, 1H15 core earnings dipped by 16% albeit a 14% topline growth due to similar reasons mentioned above. Additionally, net interest rose by 951% as interest from the recently completed IOI City Mall is now expensed, rather than capitalized.

Outlook  The group launched their maiden Bandar Puteri Bangi (GDV: RM4b) in Jan-15, comprising apartments, shop offices and 2- storey terraces with total GDV of RM600m, and thus, we could be seeing strong sales numbers in 3Q15. We gather that the project has achieved 70% take-up/bookings rates. Other than this, the sales for the year will be driven by ongoing projects. Xiamen 2, China (apartments) will likely kickoff in FY16 rather than FY15.

Change to Forecasts Downward revision in FY15-16E core earnings by 17-16% (refer overleaf).

Rating Maintain MARKET PERFORM

Valuation  Lowering TP to RM2.12 (from RM2.45) based on a higher 60% discount (54% previously) to its FD RNAV of RM5.31. The applied RNAV discount is much steeper compared to our sector average of 44% and closer to our FD RNAV discount rate of 65% for UEMS. The stock has been bashed down and is the worst performing big-cap developer given its YTD -12% returns vs. the KLPRP +2% and we reckon that investors are not comfortable with the group’s attempt to acquire a 37.2% stake in Taipei 101 for a consideration of RM2.74b (refer to 8/12/14 QB report). We opine that investors would rather see landbanking activities instead. Downside risks could be limited as at current levels, the stock is trading below its book value at 0.6x Fwd PBV and is also well below its adjusted reference price of RM2.42 (cum rights RM2.51).

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

Source: Kenanga