1Q17 CNP (RM189.6m) was within expectations (24%/25% consensus/ours). Sales for the period of RM731m were broadly within expectations of management’s and our target of RM2.3b and RM2.2b, respectively. No dividend, as expected. Earnings are maintained. Reiterate MARKET PERFORM with ex-rights TP of RM2.23.

1Q17 CNP of RM189.6m came in within expectations, as it made up 24% of street’s consensus estimate and 25% of ours.

Sales for the period was at RM731m making up 32% of management’s and 33% of our FY17E targets of RM2.3b and RM2.2b, respectively, which is broadly in-line as quarterly sales tend to fluctuate significantly. Major sales drivers were Singapore at 49% (The Trilinq), Malaysia at 31% and the remaining from China. No dividends, as expected.

Driven by China and Singapore. YoY, 1Q17 CNP rose by 64% as it was largely driven by favourable take-ups in their Xiamen, China and Singapore projects while take-ups and progress billings were meaningful in its IOI Resorts City and Bandar Warisan Puteri projects. Its property investment EBIT rose by 43% to RM42.5m on improved IOI City Mall revenue on better occupancy rates (88% to 94%) while there was an upward rental rate revision. EBIT margins did compress by 5.5ppt to 30.1% as its overseas projects have lower margins vs. its Malaysian projects. QoQ, its reported earnings fell by 51% due to FV adjustments in the previous quarter. However, CNP rose by 66% due to improvements in its JCE contributions (Seascape@Singapore) and better property investment EBIT (+13%) which help negate the fall in development EBIT (-21%). Net gearing has increased from 0.14x to 0.25x QoQ.

Outlook. The group targets to complete its 1-for-4 rights issuance of up to RM1.52b by 1QCY17. It was recently reported by The Starbiz that IOIPG 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 estimate at RM2.2b, hence no changes to earnings. Unbilled sales of RM1.59b provide less than 1-year visibility in terms of property revenue.

Maintain MARKET PERFORM with ex-rights TP of RM2.23 based discount to 58% (historical mean levels) on FD RNAV of RM5.31. While the group enjoys higher than sector average margins given its low land cost, it is concerned that its repeated cash-calls to fund acquisitions which may take time to realize earnings impact may cause overhangs to its share price while ROEs has been maintained at c.4% since IPO. Nonetheless, we note that the group is practicing active share buy-backs at these levels as a signal of confidence in their business model.

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 - 23 Nov 2016