IOI Properties Group had successfully tendered for 2.68ac of 99-year leasehold land at Central Boulevard, Singapore for RM7.77b. We are neutral to slightly negative on the deal as it will increase its FD RNAV by 5% to RM5.98 and net gearing above our comfort level of 0.65x, which increases the odds of cash-calls. No changes to earnings but lower dividends by 25%. Maintain MARKET PERFORM with a lower TP of RM2.50 on wider FD RNAV discount of 58%.

Successful tender of 2.68ac of 99-year leasehold land at Central Boulevard, Singapore for RM7.77b (SGD2.59b) from Singapore URA. The land which is a white site development within the Marina Bay area has a permissible GFA of 1.52m sf. It will have a direct link to One Raffles Quay and the Marina Bay Financial Centre, Raffles Place and Shenton Way via underground and second storey pedestrian links with seamless connection to the Downtown MRT Station (nearby Raffles Place MRT Station and the future Shenton Way MRT station). (Refer overleaf).

Neutral to slightly negative. The news comes as no surprise to us considering the news of it being the highest bidder in the last couple of days while the group has existing exposure in Singapore. Note that the group had earlier extended the use of the balance of its rights proceeds (RM238.9m) to Aug 2017. The land cost implies SGD1,689psf on GFA basis, which is fair being 62% of the recently transacted Asia Square Tower 1 by QIA (SGD2,700psf GFA) which building is adjacent to the site (buildings in the area were recently transacted at SGD2,276-3,713psf GFA basis). In Singapore, land cost can comprise of 50%-65% of GDV. Overall, this bodes well for the long-term replenishment of the group’s intentions to diversify overseas. However, we expect FY17E net gearing to rise to 0.65x from 0.23x which is above our comfort levels of 0.5-0.6x i.e. if there are more sizeable acquisitions, we can expect potential cash-calls.

No GDV guidance has been given but based on the land cost to GDV ratio in Singapore, this implies a GDV of RM12.0b-RM15.5b. It is unclear if the entire development is up for sale, although based on previous Singapore developments, they are likely to keep large components to grow its recurring income stream. Due to the ‘white site’ status, we reckon planning will require 12-18 months before commencement starts. Hence, no changes to FY17-18E earnings

pending clarity from management. We have also opted to lower both FY17-18E NPDS slightly by 25% to 6.0 sen given the heavy capital commitment.

Outlook. It was reported by The Starbiz that the group targets RM2.3b sales in FY17 with emphasis on affordable housing (Bandar Puteri Bangi, Bandar Warisan Puteri), its stronghold in Bandar Puteri Puchong (Le Pavilion) and Singapore (The Trilinq). For now, we opt to conservatively maintain our FY17E sales estimates at RM2.2b.

Maintain MARKET PERFORM with lower TP of RM2.50.The project increases our FD RNAV by 5% to RM5.98 (assuming GDV of RM15.5b). However, we widen its FD RNAV discount to 58% (historical mean levels) from 55% given the above comfort level net gearing, which implies a lower TP of RM2.50 (previously RM2.57).

Risks include: (i) weaker/stronger-than-expected property sales, (ii) margin issues, (iii) changes in real estate policies, and (iv) changes in lending environments.

Source: Kenanga Research - 14 Nov 2016