IOIPG’s FY23 results disappointed. However, we expect a stronger FY24 driven by the launch of several high-value projects in Singapore and China. Additionally, the group’s property investment and hospitality assets appear to benefit from returning overall demand. We trim our FY24F net profit by 1%, lift our TP by 9% to RM1.75 (from RM1.60) and maintain our OUTPERFORM call.

Below expectations. IOIPG’s FY23 core net profit of RM630.4m missed our full-year forecast by 15% and consensus full-year estimates by 17%. The negative deviation came from weak margins from the group’s key property development segment due to higher raw material costs experienced during the period. That said, the group declared a 5.0 sen dividend which was above our anticipated 3.0 sen payout on the back of higher reported earnings (20% payout).

YoY, its FY23 revenue was flattish due to the mix of declining property development revenue (-11%) from softening sales in China offset by improving performance in property investments (+35%, led by IOI City Mall) and hospitality (+85%) from returning footfall and tenancy in its key assets. However, core operating profit plunged by 33%, no thanks to higher raw materials and utilities cost which dragged core operating margin to 27.2% (-13.3ppts). While joint venture contributions grew by 78%, this was partly due to a RM192.7m reversal of inventories reported. All in, FY23 core operating profit declined by 22% to RM630.4m.

Briefing highlights. Although there were some challenges seen in the recent year, several tailwinds may lean towards stronger trajectory in the medium-term.

1. The group is on its way to a new landmark project in Singapore called Marina View Residences which is expected to contribute a GDV of RM8.56b. It is poised to launch by 1HFY24 in a single phase with the condition from Singapore’s Urban Redevelopment Authority that it completes construction in seven years since the land acquisition in 2021. The group hopes to achieve a near-term take up rate of 50% from its upcoming launch.

2. Another upcoming Singapore asset called IOI Central Boulevard is expected to add to the group’s property investment segment. It is quoted that 40% of its net lettable area (NLA) has been committed to date. Together with another upcoming project in China (IOI Palm City, Xiamen), it would add an additional 1.66m sq ft in NLA to the group (+21%) between CY23-CY24.

3. The existing IOI City Mall could also see greater contributions to the group with the launch of its Phase 2. We opine it may see higher tenancies going forward given the rising footfalls observed there.

4. In terms of hospitality, higher labour cost and electricity tariffs may undermine near-term profitability but the group opines that conditions could improve.

Forecasts. We trim our FY24F net profit by 1% and introduce our FY25F numbers.

However, we raise our TP by 9% to RM1.75 (from RM1.60) as we revise our RNAV inputs to capture the additions to the group’s pipeline. That said, we maintain our discount to RNAV of 60% due to IOIPG’s heavy gearing of close to 0.7x (against peer averages of 0.3x).

We continue to like IOIPG due to its focus on high-value products at matured townships with its well-diversified and expanding investment property portfolio across several key regional hubs. Maintain OUTPERFORM.

Risks to our call include: (i) a prolonged downturn in the local property market, (ii) rising mortgage rates hurting affordability, (iii) rising construction cost, and (iv) risks associated with overseas operations.

Source: Kenanga Research - 29 Aug 2023