IOIPG’s 1QFY24 results met expectations. Its near-term earnings will be driven by the roll-out of several high-value projects in Singapore and China, while its property investment and hospitality assets have turned the corner. We maintain our forecasts, TP of RM1.75 but downgrade our call to MARKET PERFORM from OUTPERFORM after the recent run-up in its share price.

Within expectations. IOIPG’s 1QFY24 core net profit of RM174.4m came within expectations at 22% of both our full-year forecast and the full-year consensus estimate.

YoY, its 1QFY24 revenue declined 6% as a stronger performance from property investment (+31%) buoyed by improved footfall and tenancy (particularly, IOI City Mall), was more than offset by lower property sales recognition in in Malaysia and China (-15%). Its core net profit fell by a steeper 15% on a 39% decline in its property development operating profit given a significant slowdown in China of which products typically command higher margins, partially cushioned by a 47% improvement in property investment operating profit (thanks to higher rental incomes from the malls and improved occupancy rates at the hotels and resorts).

QoQ, total 1QFY24 revenue dipped slightly (-3%). Property development saw lower performance (-9%) due to the softer overall property market in China and Malaysia. However, its operating profits managed to improve by 15% on a more favourable product mix from well-established townships in Kulai. Meanwhile, the lower group revenue was offset by property investment gaining 21% thanks to higher rental incomes from its malls and improved occupancy rates which led profit to increase by 53%.

The key takeaways from its results briefing are as follows:

1. It believes that property buyers in Malaysia could be held back by higher interest rates while those in China are exercising greater caution when it comes to property purchases (we believe, due to the economic downturn and a weak job market).

2. The scheduled launch of Marina View Residence in Singapore in FY24 is proceeding according to plan, with ongoing construction of the show gallery. While the actual construction has yet to begin, the completion deadline is established at 84 months post-launch. Emphasis is placed on the property's launch, anticipating future earnings in the long term. The group aims to attain a near-term take-up rate of 50% following its launch.

3. IOI Central Boulevard is anticipated to contribute to the group's property investment portfolio, and it is currently progressing as planned for a targeted completion in 2024. The group’s focus mainly is to complete and build up the occupancy rate of the project which will see contribution based on the take up. The construction phase is expected to last for an estimated 3-4 years, leading to long-term earnings.

4. The introduction of IOI City Mall Phase 2 in August 2022 has resulted in an impressive occupancy rate, averaging 95% for the group’s entire mall occupancy rate. Although there are intentions to proceed with Phase 3, the strategy involves allowing tenants to stabilize, mature, and generate income first. Simultaneously, the market is being carefully studied to avoid overcrowding due to excessive retail spaces.

5. Regarding the hospitality sector, elevated labour costs and electricity tariffs might pose challenges to short-term profitability. However, the group is optimistic that conditions could see improvement.

Forecasts. Maintained.

We also maintain our RNAV-TP of RM1.75 based on a 60% discount to its RNAV (see Page 3), in-line with our assumption for the property sector. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We continue to like IOIPG due to: (i) its focus on high-value products at matured townships with its well-diversified products, (ii) its expanding investment property portfolio which provides recurring incomes, and (iii) its presence in the vibrant property sector in Singapore. However, its valuations have become rich after the recent run-up in its share prices. Downgrade to MARKET PERFORM from 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 - 27 Nov 2023