News

Proposed acquisition of Mayang Development S/B and Nusa Properties S/B for a total consideration of RM1.93b. The target companies own 399 acres within IOIPG’s ongoing project IOI City Resort (50 acres) which fronts Putrajaya and is next to SKVE. Jones Lang Wootton has appraised the market value of the land at RM2.06b. The acquisition will be settled by issuing 644.78m new IOIPG shares (17.1% of current share base) at RM2.21/share while internally generated funds will take care of the balance.

This is an RPT as the owners of the vendors are Tan Sri Dato’ Lee Shin Cheng and related parties. The acquisition is expected to be completed in 3Q16.

Comments

Management guides RM20b GDV for the mixed development project (refer overleaf). This increases our estimated group’s remaining total GDV by 20% to RM119b. Net impact of the acquisition and new share issuance increases our FD RNAV by 5% to RM5.55.

The news came as a surprise as we did not anticipate any major landbanking activities from the group. Nevetheless, we are slightly positive on the deal. It is a plus in the longer term as IOI City Mall has done extremely well with 92% occupancy rate after less than a year in operations while the area is seeing a lot of new developments. However, the 17% dilution impact to EPS is significant in the near term as development contributions will only be meaningful in 1.5-2 years’ time. Collectively, the Lee Family’s holdings in IOIPG will be increased from c. 51% to c. 58%.

Land consideration appears fair as land cost-to-GDV ratio is at 9.6% or within the range of most acquisitions currently (8%-15%) while implied price of RM111psf appears to be reasonable considering that land prices range between RM70-230psf. FY16-17E net gearing will increase to 0.18- 0.19x from 0.16-17x.

Outlook

Going forward, the group will be launching RM2.0b worth of projects in FY16. This includes new phases of their Xiamen China project and their maiden Dengkil township project.

Change to Forecasts

No changes to earnings as we expect significant contributions in 1.5-2 years’ time. However, we have accounted for the acquisition (interest to be capitalised) and the share issuance in our estimates.

Rating

Maintain MARKET PERFORM

Valuation

We reckon that there may be some profit taking activities in the next couple of weeks given the significant dilution impact from the new share issuance and the stock has also rallied by 20% since early Sep-15. We also do not see any near-term catalyst while the property sector backdrop remains challenging. However, we raise our TP to RM2.09 (from RM2.00) based on an unchanged 62% discount to its enhanced FD RNAV of RM5.55 as the acquired land is realisable and substantial in value. The applied RNAV discount is steeper compared to our sector average of 54%. The stock is trading at 0.6x FY16E PBV which offers some downside buffer over the longer term.

Risks to Our Call

Weaker-than-expected property sales. Higher-thanexpected sales and administrative costs. Negative real estate policies. Tighter lending environment.

Source: Kenanga Research - 21 Oct 2015