1Q19 CNP of RM167m and sales of RM574m are within expectations. The group intends to launch RM3b worth of new projects this year, with emphasis in China. No changes to earnings. Downgrade to MARKET PERFORM with an unchanged TP of RM1.65 given the recent sharp share price rebound while we see no near-term catalyst to review valuations. However, our recommendation could be reviewed if the rumoured corporate exercises take place.

Within expectations. 1Q19 CNP* of RM167m is within expectations at 24% of street’s full-year estimate and 27% of ours. Sales for the quarter of RM574m made up 28% of our FY19E target of RM2.05b; sales were driven by China (49%), Malaysia (45%), and Singapore (6%). No dividends, as expected.

Result Highlights. QoQ, 1Q19 CNP decreased by 14%. The improvement in property segment EBIT margins by 17.1ppt to 28.2% was brought about by more China contributions and clearing of inventories; this partially cushioned the decline in revenue (-17%) due to weaker property billings, and higher effective tax rate at 44% (4Q18: 11%) due to China’s higher tax rate. YoY, CNP fell 11% as 1Q18 saw more recognition from Trilinq (completed units) and local project billings compared to this quarter. Net gearing has crept up to 0.53x (vis-à-vis our comfort levels of 0.5-0.6x) and is expected to keep increasing due to the Central Boulevard, Singapore project which is earmarked for property investment purposes. Inventories (at cost) have eased slightly by 5% to RM2.0b.

Banking on overseas projects. It was reported by The Edge (31-Oct) that IOIPG intends to launch RM3b worth of projects in FY19 (FY18: RM2.8b) and Group CEO Lee Yeow Seng’s optimism is driven by their overseas projects like their recently launched D4-D5 Xiamen, China project (GDV: RMB1b) which achieved more than 90% bookings within a day. He also added that they have some RM2.4b (RMB4b) worth of projects to be rolled out over the next two years (mid-to-high-rise condominiums and town villas in IOI Palm City, Xiamen). However, we think sales will be challenging because; (i) its Singapore projects are high-end properties where the government has raised the Additional Buyer’s Stamp Duty (ABSD) and tighten LTV limits on residential property purchases, (ii) Malaysia projects due to affordability issues and potential ‘wait-and-see’ buyers’ attitude in anticipation of the full effects of the 10% house price reduction as committed by REHDA members. Hence, our estimates are maintained (refer overleaf).

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged TP of RM1.65 based on 69% discount to its FD RNAV of RM5.31. The applied discount is at -1.5SD or within the range of our universe (-1.0SD to -2.0SD). We had upgraded the stock to OUTPERFORM recently (5/11/18) following Budget-2019 announcement and its share price dipping to a new low of RM1.36 since its listing in 2014. However, share price has since rebounded by a sharp 23% since our upgrade, surpassing our TP, which could be due to market speculations of a corporate exercise (refer overleaf). Pending further clarity from management, we are comfortable with our current valuation basis as 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 14.7x is slightly below its historical average of 16.9x.

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 - 26 Nov 2018