9M16 CNP of RM534m was above market (85%) but within our expectations (76%). Sales for the period were RM1.46b which is on schedule being 80% of our FY16E target of RM1.84b. No dividends, as expected. Maintain earnings and reiterate UNDERPERFORM with unchanged TP of RM2.09.

9M16 CNP of RM534m was above market expectations but within ours, at 85% of street’s FY16E estimates and 76% of ours. Our CNP excludes RM156m fair-value gain on investment property and a one-off gain from acquisition of subsidiaries at bargain prices. 9M16 sales came in at RM1.46b or 80% which we deem as within our FY16E sales target of RM1.84b (flat YoY); management does not provide sales targets. Sales were largely driven by China (50%), Malaysia (31%) and Singapore (19%). No dividends were proposed, as expected. 3Q16 only registered RM402m sales (-47% QoQ). As there are no major launches in 4Q16, we can expect weaker sales then.

3Q16 CNP of RM112m dipped by 64% QoQ on lower property billings while EBIT margins was down by 2.3ppt to 33.4% as all major drivers (development, investment and leisure/hospitality) saw compressions in margins. 9M16 CNP rose by 72% YoY largely due to billings from projects with healthy take-up as these projects are at more critical construction stages (e.g. Trilinq@Singapore, IOI Palm City Ph2@Xiamen).

Key launches for FY16 (GDV: RM2.0b) includes: (i) c.RM600m GDV from Xiamen China project (Xiamen Phase 2 and Xiamen Phase 1 Block 1 commercial portion), (ii) maiden launch of Bandar Puteri Warisan township project, (iii) maiden launch of Conezion@IOI Resort City in Mar-16, (iv) new phases from already launched projects like Bandar Puteri Bangi and 16 Sierra.

No changes to earnings. Unbilled sales of RM1.51b provide less than 1 year of earnings visibility.

Maintaining TP of RM2.09 based on 62% discount to its FD RNAV of RM5.55. The applied discount is close to its historical mean of 58%, which we think is fair considering weak sector dynamics while there is no clear catalyst in the foreseeable horizon. We had downgraded IOIPG to UNDERPERFORM (from MP) in our 2Q16 Property Sector Strategy Report (25/3/16 ), “Make Hay While the Sun Shines”, as share price had surpassed our TP at that time while we saw no reasons to adjust our valuations. Since then, the price hit a high of RM2.45 in Apr- 16 and has since retreated to RM2.25 today, erasing most of its gains YTD. Big-cap developers (> RM3.0b market cap*) are trading at an average FY16-17E PER is at 13.5x-12.6x while IOIPG is trading at higher levels of 14.1x-13.9x. At this juncture, we are concerned that the sector may undergo a de-rating due to earnings risks and structural changes in the sector, which may mean selling pressure on stocks that have fared well this year; IOIPG saw +2.3% YTD vs. the KLPRP -2.0% YTD. Coupled with the possible shares overhang arising from the placement exercise earlier this year, we believe the stock may continue to see further downsides. Reiterate UNDERPERFORM.

Risk to our call includes: Better-than-expected property sales. Positive real estate policies. Loosening lending environment.

Source: Kenanga Research - 30 May 2016