Period

3Q15/9M15

Actual vs. Expectations

9M15 core earnings of RM310.0m met our expectation but missed that of the market as it accounted for 75.0% and 63.0% of the respective full-year estimates. We reckon consensus might have been too bullish with their development and property investment margins assumptions. This is the 5th consecutive quarter where IOIPG has missed market expectations.

3Q15 sales of RM390.0m were up by 44.0% QoQ due to their Bangi project’s stellar performance. However, 9M15 sales amounted to RM1.02b which is well behind our FY15 target of RM2.0b. Composition of 9M15 sales are: 87.0% from Malaysia, 5.0% from China and 8.0% from Singapore.

Dividends

None, as expected.

Key Results Highlights

QoQ, core earnings was up by 6.0% on improved leisure/hospitality contributions. Although group EBIT was compressed by 6.7ppt due to higher A&P and administrative expenses, it was more than compensated by the higher net interest income (+122.0%) arising from proceeds from the rights issue and capitalisation of interest expense.

YoY, 9M15 core earnings were down by 4.0%, despite the 25.0% increase in topline. Overall, EBIT margins were squeezed by 3.2ppt given more recognition of lower margin projects (likely Xiamen 1) which dragged development margins (-2.4ppt) while property investment saw higher operating costs as IOI City Mall is still in its infancy. Furthermore, share of associates/JCE was significantly lower (-111.0%) due to less Singapore project recognitions.

Outlook

Their maiden Bandar Puteri Bangi (BPB) (GDV: RM4.0b) was launched in Jan-15 and we gather Phase 1-3 (GDV: RM600.0m, but only half was launched and comprised of apartments, shop offices and 2-storey terraces) has achieved 80.0% take-up. Sales for the remaining part of the year will be driven by on-going projects. Positively, Xiamen 2, China (apartments) will be brought forward and will kickoff in 4Q15, instead of FY16, which will also help drive sales.

Change to Forecasts

No changes to estimates. Although 9M15 sales appears to be behind our target, their Xiamen 2 project (est: GDV: RM0.8b) could surprise on the upside, as demonstrated last year, while the group will be launching its remaining part of BPB Phase 1-3. Unbilled sales of RM1.49b provide less than a year visibility.

Rating

Maintain MARKET PERFORM

Valuation

No changes to TP of RM2.12 based on 60.0% discount to its FD RNAV of RM5.31. The applied RNAV discount is steeper compared to our sector average of 53.0% and closer to our applied discount rate of 65.0% for UEMS. Downside risk appears to be limited as at current levels, the stock: (i) 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), (ii) has been bashed down and is one of the worst performing big-cap developer given its YTD -11.0% returns vs. the KLPRP 1.6%. However, we do not see any near-term catalysts while the property sector backdrop remains challenging.

Risks to Our Call

Weaker-than-expected property sales.

Higher-than-expected sales and administrative costs.

Negative real estate policies.

Tighter lending environment.

Source: Kenanga Research - 15 May 2015