9MFY20 CNP of RM445.3m (-16% YoY) disappointed, accounting for 70%/71% of our/consensus full-year expectations. The earnings shortfall was mainly due to Covid-19-triggered disruptions, which hit across the board affecting the Group’s property development, property investment and hospitality & leisure businesses. With the final quarter expected to come in broadly weak, we have trimmed our FY20E/FY21E CNP by 17%/1%. While the stock has climbed 21% since our last update, our unchanged TP of RM1.21 (based on PBV multiple of 0.37x) suggests there is still potential upside. Maintain our OUTPERFORM call.

Missed expectations. 9MFY20 CNP of RM445.3m (-16% YoY) came below expectations at 70%/71% of our/consensus full-year projections. YTD performance saw lower pre-tax profit (before forex and interest) contributions from property development (-15% to RM497.9m), property investment (-16% to RM175.9m) and hospitality & leisure (-71% to RM3.4m). Essentially, earnings momentum was hit by disruption of business activities triggered by the Covid-19 pandemic in China (started in Feb) and Malaysia (since mid-Mar).

Result highlights. The Covid-19 impact was felt in 3QFY20, with CNP at RM82.2m (-52% YoY/-53% QoQ). By segmental reporting, pre-tax profit (before forex and interest) plunged across the board, namely property development (-39%YoY/-40% QoQ to RM103.3m), property investment (-43%YoY/-21% QoQ to RM49.4m) and hospitality & leisure (which slipped into a loss of RM15.1m vs. profits of RM0.5m in 3QFY19 and RM13.1m in 2QFY20). Bottomline was also dragged down by higher-than-expected effective tax rate of 48.0% (vs. 3QFY19’s 35.8% and 2QFY20’s 29.8%). As of end-Mar 2020, the Group is in a net debt position of RM9.56b, translating to a net gearing of 51%.

Outlook. In spite of the challenging times, the Group registered new property sales of RM1.14b in 9MFY20, comprising 75% from Malaysia, 24% from China and the balance from Singapore. Unbilled sales stood at RM517m as of end-Mar 2020. Going forward, its strategy is to focus primarily on mid-range properties in Malaysia.

Earnings adjustments. With 4QFY20 likely to be relatively weak due to extended disruptions to business activities particularly in Malaysia, we have adjusted our FY20E/FY21E earnings by -17%/-1% to RM534m and RM687m, respectively.

Still an OUTPERFORM. Our TP is unchanged at RM1.21, which is derived from a P/BV multiple of 0.37x (minus 1SD 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). This suggests residual potential upside for IOIPG even after rising 21% since our last sector update. Our call remains an OUTPERFORM.

Risks to our call 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 - 1 Jun 2020