We hosted a meeting with Dato’ Voon Tin How (CEO of IOIPG) to obtain updates on the group’s operations in Malaysia, China and Singapore. Given the group’s low level of investor engagement all this while, we came away from the meeting with a much stronger conviction due to better clarity over earnings trajectory in the medium-term with new recurring income stream from incoming property investment assets (IOI City Mall Phase 2, Central Boulevard) to provide earnings growth from FY23-24 onwards. Maintain OP with a higher TP of RM1.65 (from RM1.32) on higher Fwd. PBV of 0.45x.

Key incoming assets in FY23 and FY24 have obtained satisfactory precommitment leases. IOI City Mall Phase 2 (1.1m sf) and Central Boulevard Towers (1.3m sf) will see tentative completion in 3QCY22 and 2HCY23, respectively. These two key assets will boost IOIPG’s existing NLA of 6.5m sf by 36%. Currently, IOI City Mall Phase 2 has obtained >70% pre-commitment leases while Central Boulevard has seen strong demand from global MNCs (tech-related).

We understand that upon operational commencement, there will be minimal gestation period with earnings contributions able to peak and normalise within a short period of time. Based on our estimates, Central Boulevard could deliver c.RM200m bottom-line contributions (extrapolated based on IOIPG’s 49.9% JV stake in South Beach’s steady contribution of c.RM40- 50m/annum). As for IOI City Mall Phase 2, we worked out that earnings could be c.RM30m/annum assuming full occupancy.

IOIPG’s management targets RM2.1b sales in FY22E (our target is RM1.9b) with RM2.1b planned launches. As of 1HFY22 (Dec 2021), IOIPG has raked in RM896m sales backed by RM1.15b launches (Malaysia: 66%, China: 34%). For the rest of the year, the remaining RM0.9b launches will mostly come from Klang Valley (64%), Johor (28%) and China (6%). While the current high building material prices could dampen margins in the short term, IOIPG’s historically low land costs provide buffer to absorb such shocks. Note, IOIPG has the higher GP margins among developers under our coverage.

Potential catalyst: REIT-ing of investment properties to unlock value – which management shares that such option is always “on the table”. Based on yield assumption of 5.5% on pre-Covid bottom-line earnings of c.RM180m, their existing property investment and hospitality assets (Malaysia only) are worth RM3.3b. If the new IOI City Mall Phase 2 earnings of c.RM30m are included, the cumulative Malaysian assets could fetch c.RM3.8b valuations. Note, this valuation exclude: (i) China’s Palm City mixed development which has a mall, upcoming office and hotel, (ii) 49.9%- owned South Beach Tower & Retail, and (iii) the upcoming Central Boulevard Towers. For simplicity, Central Boulevard’s potential contribution of RM200m/annum at a 6% yield alone could command equity valuations of RM3.3b. Based on IOIPG’s current market cap of RM5.7b vs. their existing and incoming portfolio of investments (refer overleaf for table), we find its share price undervalued.

Keep FY22E/FY23E earnings unchanged and maintain OP with higher TP of RM1.65 (from RM1.32) on higher rolled over FY23E PBV valuations of 0.45x (from 0.37x) based on 0.5SD above its 5-year mean. Despite the challenging property outlook now, we believe the group’s consequent earnings growth, improving ROEs and event-driven catalyst (i.e. REIT) could eventually provide valuation re-ratings. That said, we note that these catalysts may require some time to materialise.

Other meeting highlights

Current stretched net gearing of 0.7x due to Marina View land purchase (SGD1.508b) will come off once residential units within this mixed development are built and sold. For the time being, IOIPG is no longer looking for any land banks whether in Singapore or China. IOIPG assured that no equity fund raising exercise is required.

No more rental rebates provided. IOIPG no longer provides any rental rebates to their tenants. Hence, alongside the reopening of borders and relaxed SOPs, we anticipate earnings from key retail assets to revert back to pre-pandemic levels. Management shared that all their retail malls have few dropouts with healthy occupancy rates. IOI City Mall Phase 1 is 95% occupied.

Unsold inventory stood at RM2.2b in which Malaysia made up 85% while China made up the rest. Within the 85% Malaysian completed inventory, 67% is in the Klang Valley, 20% in Johor and the remainder 13% from other states. In terms of property type breakdown, the RM2.2b inventory comprises 78% residential and 22% commercial.

As of 1HFY22, China has a remaining GDV of c.RMB1.0b and these remaining GDV will be depleted in the next three years.

Source: Kenanga Research - 29 Apr 2022