1HFY20 CNP of RM363.2m (+1% YoY) came within expectations, representing 56%/54% of our/consensus full year expectations. The slight drop in property development contribution in the first-half was offset by better performance by the property investment and hotel & leisure divisions. Reaffirm OUTPERFORM call with a slightly lower target price of RM1.45 (from RM1.55) based on adjusted P/BV multiple of 0.44x.

1HFY20 on track. 1HFY20 CNP came in at RM363.2m, which represented 56% of our full-year estimate and 54% of consensus expectation. At the operating profit level (before forex, interest and associate/JV), the lower earnings from property development (-5%) was offset by higher contributions from property investment (+3%) and hotel & leisure (+69%). No dividend was declared in 2QFY20, as expected.

Result highlights. 2QFY20 CNP of RM174.4m was down 8% QoQ and 14% YoY, dragged by lower property earnings (which posted operating profit before forex, interest and associate/JV of RM172.0m (- 23% QoQ/-32% YoY), as China contribution came in weaker during the quarter. This was mitigated by higher contribution of RM13.1m from hotel & leisure (+145% QoQ/+121% YoY).

3QFY20 may be slightly weak. Essentially, IOIPG’s operation in China could be affected by the ongoing Covid-19 outbreak, which is expected to lead to deferment of property launches and construction progress. To cushion this impact, the Group intends to focus on aggressive marketing and promotion initiatives on the affordable homes segment in Malaysia.

Earnings forecasts intact. We are keeping our forward earnings as sequential quarterly earnings could come in marginally weaker due to the slower momentum in China.

Still an OUTPERFORM with a slightly lower TP of RM1.45 (from RM1.55 previously). This is derived from a P/BV multiple of 0.44x (minus 0.5SD below its 3-year historical band) on an adjusted BV/share of RM3.28 (after imputing a 40% discount to its latest available inventory level of completed properties). While the property sector outlook remains challenging, we believe the stock is oversold, currently trading at depressed P/BV valuations.

Risks include: (i) weaker-than-expected property sales arising from a prolonged US-China trade war and Covid-19 pandemic, (ii) margin compressions, (iii) changes in real estate policies/lending environments, and (iv) M&A/privatisation/cash-calls.

Source: Kenanga Research - 26 Feb 2020