FY18 CNP of RM661m came below expectations, being the third consecutive quarter of disappointment. Full-year sales of RM1.88b also missed. Dividend of 5.0 sen (2.8% yield) is weaker than expected. FY19 will see more launches from Xiamen, China. Reduce FY19E CNP by 17% with a lower sales target of RM2.05b. Maintain MARKET PERFORM with a TP of RM1.70 with RNAV discounts pegged at historical peak levels.

FY18E CNP of RM661m missed expectations at 87% and 91% of street’s and our full-year estimates, respectively; this is the third consecutive quarter of earnings disappointments. The negative deviation stemmed from lower-than-expected billings and development margins. IOIPG recorded RM1.88b (-34% YoY) sales for the year, which missed our FY18E target of RM2.21b. First interim dividend of 5.0 sen (-17% YoY) was declared, which is below expectation as it only made up 83% of our FY18 estimates (no final dividend is expected).

Result highlights. QoQ, 4Q18 CNP rose sharply by 71% to RM194m on the back of higher property contributions and a lower effective tax rate which was driven by the FV adjustments, unrealized FOREX and unused Investment Tax Allowance (ITA) of RM40.5m. The latter more than mitigated the weaker group PBT margins (excluding FV adjustments) of 21% (-20.0 ppt) brought about by lower product margin mix. YoY, FY18 CNP was down by 30%, which was in tandem with its group revenue declining by 33% and losses stemming from its associates/JCE. Net gearing eased to 0.51x; our comfort levels are at 0.5-0.6x. Inventory levels have leaped to a new high of RM2.1b (at cost).

FY19 banks on Xiamen, China. There is no official sales target for FY19, although we gather from management that they will be looking to launch RM1.8-2.0b worth of new launches, of which c.50% will be locally driven, while the remaining are from this Xiamen, China project. (Refer overleaf for details).

Reduce FY19E CNP by 17% after house-keeping, particularly given the lower FY18 sales achieved and cutting FY19E sales target by 15% to RM2.05b. Furthermore, we introduce FY20E sales target of RM2.13b and corresponding financial estimates. Unbilled sales have dropped to a record low of RM648m, which provides less than a year’s visibility; however, this is likely to pick up once its China projects are launched given the high completion levels.

Maintain MARKET PERFORM with an unchanged TP of RM1.70 based on 68% discount to its FD RNAV of RM5.31. We already apply historical peak RNAV discount on IOIPG. However, we see no foreseeable earnings catalyst at this juncture while its CAPEX obligation for the Central Boulevard project will limit expansion capability, unless there are cash-calls (or hybrid financing). Meanwhile, its Fwd PER of 15.7x is close to the historical average of 17.2x.

Risks include: (i) weaker/stronger-than-expected property sales, (ii) margin fluctuations, (iii) changes in real estate policies/lending environments, and (vi) M&A/cash-calls.

Source: Kenanga Research - 28 Aug 2018