1H19 CNP of RM378m came above expectations while sales of RM1.04b is on track to meeting our target of RM2.05b. No dividends, as expected. However, inventory levels remain high while net gearing (0.56x) increased due to Central Boulevard works. Expect the group to roll out more Xiamen, China projects, although timing of launches will be the swing factor in earnings. Raise FY19-20E CNPs by 7-6%. Maintain MARKET PERFORM with an unchanged TP of RM1.65.

Earnings above, but sales on track. 1H19 CNP of RM378m is above expectations, accounting for 56% of street’s full-year estimate and 60% of ours. Earnings saw better-than-expected JCE contributions and operating margin while revenue was actually within our expectation (52%). 1H19 sales of RM1.04b (Malaysia: 56%, China: 41%, Singapore: 3%) are on track to meeting our FY19E target of RM2.05b. No dividends, as expected.

China is the main driver. QoQ, 2Q19 CNP was up by 25% due to its Xiamen 2 (D3, D4, D5), China projects, which have high take-up rates and is at least 50% completed, resulting in strong margin expansions in group EBIT margins to 44.9% (+13.1ppt). Additionally, associate/JCE contributions rose sharply to RM39m (from RM7m) due to higher sales and billings from its JCE projects like Southbeach, Singapore and PJ Midtown. YoY, 1H19 CNP increased by 7% albeit a 22% decline in revenue largely due to the reasons mentioned above. Net gearing has risen to 0.56x (1Q19: 0.53x) which is expected given their Central Boulevard construction works. Inventory levels remain at RM2.0b (at cost), which is one of the highest amongst our coverage.

Banking on overseas projects. Back in Oct 2018, The Edge reported that IOIPG intended to launch RM3b worth of projects in FY19 (FY18: RM2.8b) with Group CEO Lee Yeow Seng’s optimism driven by their overseas projects such as their recently launched D4-D5 Xiamen, China project (GDV: RMB1b) which achieved more than 90% booking 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 are prudent with our sales target as: (i) its Singapore projects are high-end properties where the government has raised the Additional Buyer’s Stamp Duty (ABSD) and tightened LTV limits on residential property purchases, and (ii) Malaysia projects are capped by affordability issues.

Raise FY19-20E CNP by 7%-6% to reflect higher JCE contributions and stronger development margins for its China project. However, we maintain our FY19-20E sales assumptions at RM2.05b-RM2.13b. Unbilled sales have reached a record low of RM564m and are mostly driven by local projects.

Maintain MARKET PERFORM 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 valuations (- 1.0SD to -2.0SD). 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). Even with our earnings increase, we note that FY19-20E ROEs remain low at 3.5- 3.4%. Nonetheless, IOIPG’s Fwd. PER of 14x is slightly below its historical average of 17x and is trading at a historical low Fwd. PBV of 0.5x, implying limited downside risks.

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

Source: Kenanga Research - 27 Feb 2019