IOIPG hasannounced a 1-for-4 rights issue at an issuance price of RM1.38 which does not surprise us. They intend to raise RM1.52b largely for repayment of borrowings which is largely driven by the recent land acquisition of Central Boulevard, Singapore and it will lower net gearing to 0.42x. We are concerned of their frequent cash-calls and madeno changes to earnings estimates. Maintain MARKET PERFORM with a lower exrights TP of RM2.23.

1-for-4 rights issue at RM1.38/rights share. The rights issue price (TERP) is at a 35.5% discount to the 5-day VWAP price of RM2.14 which should raise RM1.52b. Share base will be increased by 25% to 5.53b. The main purpose of the cash-call is to repay borrowings related to the group and/or that of those arising from the recent Central Boulevard, Singapore land purchase (RM7.77b). The major shareholders have given irrevocable and unconditional undertakings to subscribe to their portion or any additional ones if other shareholders do not take it up. The expected completion is in 1QCY17.

Cash call is not a surprise. Post the announcement of the successful land tender of Central Boulevard land, we had forecasted FY17E net gearing to surge to 0.65x from 0.23x which is above our comfort levels of 0.5-0.6x, prompting us to anticipate a potential cash call then. Post the rights issuance, we expect FY17E net gearing to fall to 0.42x which is at more manageable levels. We also gather that a large component of the project will be kept for investment property purposes, which further add to the capex commitment of the project. There are no changes to earnings but expect FY17E core EPS will be diluted by 20% to 13.6 sen while corresponding PER expands by 14% to 16.3x or historical mean levels.

Frequent cash-calls.Note that the group has had cash calls every year since 2014 to fund landbanking plans (rights issue of RM1.0b in 2014, placement of RM1.4b in 2015) and including this rights issuance, total fundraised has amounted to RM3.9b. We are concerned of the rampant cash calls while their expansion plans maybe too ambitious as returns on their investments may take much longer to bear fruits. Although the group has seen decent FY14-16 CAGR in core earnings of 19%, ROE remains flat at 4.3%.

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

Maintain MARKET PERFORM with a lowerex-rights TP of RM2.23. The cash call dilutes our FD RNAV by 11% to RM5.31 and assuming an unchanged discount of 58% (historical mean level), this implies an ex/cum-rights TP of RM2.23/2.44 (previous cum-rights TP of RM2.50).

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 - 21 Nov 2016