We  initiate  coverage  on  IOIPG  with  a  BUY  rating  and  MYR3.50  FV. IOIPG’s massive township developments – a segment less vulnerable to sector  cooling  measures  –  will  provide  the  company  with  sustainable sales.  IOI’s  backing  has  benefitted  IOIPG,  with  an  easier  source  of landbank  and  high  margins  for  property  developments.  Future  value will be unlocked via a pool of investment assets worth >MYR2bn.

• A  successful  township  developer.  IOIPG  is  one  of  the  largest  listed developers  in  Malaysia.  Almost  all  of  its  local  projects  are  township developments  –  an important factor  as demand for landed properties  is typically more resilient. This  segment is also less sensitive to the recent regulatory changes. IOIPG  has MYR26bn worth of projects in the Klang Valley and Johor alone, representing almost 50% of total GDV.
• Overseas  projects  provide  diversification.  Overseas  projects  in Xiamen, China, and Singapore give IOIPG the flexibility to be responsive to changes in market conditions.  The debut of the Xiamen project was successful, with all  480 units launched in Sept 2013 taken  up. Earnings from China are expected to kick in from FY14 onwards.
• Backing of IOI means easier source of landbank. Another competitive advantage  that  IOIPG  has  over  its  peers  is  the  backing  of  a  strong parent company,  IOI Corp (IOI MK,  BUY,  FV: MYR4.83)  –  a plantation company  with  163,000ha  of  oil  palm  land  in  Malaysia.  IOIPG  has sourced  landbank from IOI in the past  and, due to the cheap land cost, the former’s gross margin is higher at 56-60% vis-à-vis peers 25-30%.Further  value  unlocking  potential  via  property  investment  assets.
• IOIPG  has  accumulated  almost  MYR2bn  worth  of  property  assets  and will  add more to the pool,  given  its  pipeline developments  such as IOI City  Mall,  South  Beach  and  Xiamen  malls  and  offices.  An  asset monetisation exercise is expected in 3-5 years’ time.
• Expect double-digit earnings growth. We expect FY14-15 earnings to grow  at  13-15%  per  year,  on  the  back  of  MYR1.2bn  worth  of  unbilled sales and MYR20bn development GDV over the next three years.
• BUY;  FV  at MYR3.50.  Given  IOIPG’s  MYR8.1bn  market cap  at listing, the company  is  qualified  to be  on  investors’  radar  screens. We initiate coverage on IOIPG with a BUY rating and MYR3.50 FV.

Grown Bigger

The history
IOIPG  is coming back in a bigger way with a larger market cap of  about MYR8.1bn(based on a reference price of MYR2.51) vs MYR1.5-2bn prior to its delisting in 2009. The company  was privatised four years ago  as part  of  its efforts  to pursue various landbank acquisitions. The stock was also fairly illiquid  back  then. During the period when  it  was  solely  held  under  IOI,  IOIPG  aggressively  expanded,  both  locally  and overseas. Today, IOIPG has a net asset base of MYR10.6bn (Sept 2008: MYR3.2bn) and a landbank size of  about  14,000  acres,  including 10,000  acres of development land, compared with about 5,000 acres previously.

Experienced management team. Tan Sri Dato’ Lee Shin Cheng’s youngest son, Mr Lee Yeow Seng, has been appointed as IOIPG’s CEO.  Prior to this, he was actively involved in corporate affairs and general managem ent within the IOI group. Lee holds an  LLB  (honours)  from  King’s  College  London.  IOIPG  is  led  by  a  team  of professionals  – most of which are  long-serving  staff in IOIPG/IOI. Mr Teh Chin Guan is the property director.  Before joining IOI in 2006, he held various senior positions in Berjaya Land  (BL MK, NR).  Teh  now  heads the day-to-day operations in the  Klang Valley and participates in business planning with other directors. Ms Lee Yoke Har is the senior general manager of marketing and business development.  She joined IOI as  a  legal  executive  in  1996  and  was  subsequently  transferred  to  the  property division.  Lee  is  responsible  for  managing  and  implementing  marketing  and  sales strategies for Klang Valley projects and overseeing the leasing and management of IOIPG’s investment properties.

The board of directors of IOIPG consists of:
i.  Tan Sri Dato’ Lee Shin Cheng – executive chairman
ii.  Dato’ Lee Yeow Chor – executive director
iii.  Mr Lee Yeow Seng – executive director
iv.  Tan Sri Ong Ka Ting – senior independent non-executive director
v.  Dr Tan Kim Heung – independent non-executive director
vi.  Datuk Tan Kim Leong – independent non-executive director
vii.  Datuk Lee Say Tshin – independent non-executive director

Overview of IOIPG
IOIPG  has four divisions: i) property development, ii) property investment, iii) leisure & hospitality – golf courses and hotels, and iv) plantations. The property development and  investment  divisions  are  the  key  earnings  contributors,  making  up  more  than 90% of group profits.To date, IOIPG  has a landbank size  of about 14k acres, carrying a total GDV of over MYR50bn, based on our estimates.  According to the management, the  development GDV over the  next three years  amounts  to  MYR20.2bn (some  land parcels  have  no development  plans  as  yet).  While  exposure  to  the  overseas  market  is  minimal  in terms of landbank size, the contribution is more material by GDV, ie local:overseas is equivalent to 57%:43%. Locally, most of IOIPG’s  existing projects are located in the Klang Valley (Puchong) and Johor (Kulai). Prior to its listing, the internal restructuring exercise within IOIPG has seen the injection of new sizeable land parcels in Segamat and  Tangkak  (both  in  Johor)  and  in  Bahau,  Negeri  Sembilan.  Based  on  the  latest FY13  numbers,  almost  100%  of  the  company’s  topline  comes  from  operations  in Malaysia. Given  its  joint venture  (JV)  stake in  projects in  Singapore, earnings from these projects kick in only at the associate level.

IOIPG will have a share base of  about 3.2bn. Upon listing, IOIPG’s market cap could potentially surpass that of UEM Sunrise (UEMS  MK, NEUTRAL, FV: MYR2.73). In terms  of  landbank  size,  total  portfolio  GDV  and  earnings  base,  the  company  is certainly comparable to top peers in the industry. Hence, it  should be on investors’ radar  screens  for  property  exposure.  Shareholding  of  the  major  shareholders  post listing  has yet to be confirmed, but Tan Sri Lee’s shareholding will likely be around 45%.

Investment thesis
At a MYR2.51 reference price, we see upside in the stock. The key four angles are:
i.  Township developments ensure sustainable demand and hence earnings
ii.  Overseas ventures providing diversification
iii.  The backing of IOI means an easier source of landbank
iv.  Further value-unlocking via property investment assets

A  successful  township  developer.  IOIPG  has  about  MYR26bn  worth  of  ongoing and new township projects in  the Klang Valley and Johor alone, making up almost half of the total portfolio GDV. As an indication, all existing townships in Puchong and Johor  contributed  about  MYR580m  and  MYR465m  respectively  to  property development revenue in FY13.

IOIPG  is  an  established  township  developer  with  a  track  record  of  more  than  20 years in the industry. Over the years, the company has successfully developed a few renowned  self-contained  townships,  such  as  Bandar  Puteri  Puchong,  Bandar Puchong  Jaya,  Bandar  Putra  Segamat  and  Bandar  Putra  Kulai.  The  company’s market position in township development is well-entrenched and this will not change in the long-term.  In view of this, the bread-and-butter projects will provide IOIPG  with sustainable sales, given Malaysians’ preference for landed properties in general. The township segment is also less sensitive to the recent regulatory changes.

Although  the  remaining  landbank  is  not  large  for  its  existing  township  projects, particularly those in the Klang Valley (Bandar Puteri, Puchong Jaya and 16 Sierra in Puchong),  IOIPG  will  replenish  that  with  the  upcoming  launch  in  Bandar  Puteri Warisan  @  Sepang  and  Bandar  Puteri  @  Bangi.  Both  projects  have  a  GDV  of MYR2.5bn  and  MYR2.6bn,  and  landbank  size  of  332  acres  and  360  acres, respectively.

Bandar Puteri Warisan – The bulk of planned products here include terraces and townhouses. We see strong  development  potential  for  Bandar  Puteri Warisan. The  site  is  not  far  from  IOIPG’s  existing  project  –  16  Sierra.  The  land  is  also located  next  to  the  Salak  Tinggi  express  rail  link  (ERL)  station,  and  opposite Glomac’s  new  Saujana  KLIA township,  which  has  a  GDV  of  MYR1.2bn.  More than 10,000  employees and workers at LCCT and KLIA will be the key driver  of property demand  there. Residents who work in Kuala  Lumpur  may opt to travel via  the  ERL,  and  it  will  only  take  about  30  minutes  to  KL  Sentral  (a  one-way ticket costs MYR12.50). Meanwhile, it  was also reported that Xiamen University is going to set up its first overseas branch campus on a 150 -acre site at Salak Tinggi, with a student capacity of 10,000. Near to the airport, there are also plans to build a premium outlet.

Given all the upcoming  developments  in the surrounding area, houses at Kota Warisan  have  appreciated  over  the  years.  Linked  houses  there  are  currently commanding  a  market  price  of  about  MYR450,000-500,000  per  unit.  Given IOIPG’s  track  record  in  bringing  up  property  value,  as  proven  by  its  Bandar Puteri Puchong and 16  Sierra projects, we believe this  new township project will similarly receive good response from the market.

Bandar  Puteri  @  Bangi  –  As  for  the  new  township  in  Bangi,  the  land  is strategically located close to the North-South Highway, at the border of Selangor and Negeri Sembilan. Along the highway, major developments include Southville by Mah Sing (MSGB MK, NEUTRAL, FV: MYR2.44) and Bandar Seri Putra by UM Land. Due to land scarcity in the city centre and,  hence,  expensive property prices,  demand  for  properties  has  gradually  shifted  towards  the  city  centre’s outer  areas  as  of  two  years  ago.  The  southern  part of  the  Klang  Valley  –  the Kajang/Semenyih/Bangi  enclaves  –  has  been  the  new  focus,  due  to  better connectivity to  Kuala  Lumpur. SP Setia (SPSB MK, NEUTRAL, FV: MYR3.54), Mah  Sing  and  EcoWorld  SB  are  among  the  few  players  that  have  positioned themselves here.

IOIPG’s Bandar Puteri @ Bangi is expected to be  similarly  well-received,  given its track record. The  project’s  concept is similar to Bandar Puteri Warisan, with a slightly  bigger  commercial  component.  The  residential  precincts  will  be  gated and guarded and well landscaped, with different themed gardens.

Although the Iskandar Malaysia market is getting more challenging due to the cooling measures  imposed  by  the  Government,  the  impact  to  IOIPG  will  not  be  too substantial,  as  most  of  its  projects  in  Johor  are  township  developments,  for  which demand is more genuinely driven and less speculative.

• Bandar  Putera  Kulai  –  The  6,000-acre  township  is  IOIPG’s  key  development project in Iskandar  Malaysia, where it  still has a balance landbank of over  3,000 acres.  Currently,  about  MYR1.4bn  worth  of  projects  have  been  planned,  while the  remaining  land  has  no  development  plans  as  yet.  The  location  of  the township  is  strategic  –  it  is  only  a  10-minute  drive  to  the  Senai  International Airport, 25 minutes to Johor Bahru, eight minutes to Johor Premium Outlet (JPO) and 30  minutes  to  the Woodlands and  Tuas checkpoints  to  Singapore. Over the years, Bandar Putera Kulai has become a self-contained township  –  equipped with amenities such as a recreational park, schools, an IOI Mall, shops, golf club and club house.  Following  the opening of JPO and  the subsequent heightening commercial  activities  in  the  surrounding  area,  sales  in  the  township  has increased,  with  FY13  revenue  contribution  from  here  doubling  to  about MYR243m.
• Other  projects  in  Iskandar  Malaysia  include  Kempas  Utama,  Lagenda  Putra, Bandar Putra Segamat and The Platino.  IOIPG  has  also entered into Medini at an attractive land cost of MYR39 psf (approved with 11x plot ratio and GFA of 2.5m  sqf).  A  few  50-56  storey  luxury  condominium  (condo)  blocks  –  totalling 2,200-2,400  units  –  will  be  put  up.  Given  the  current  bearish  sentiment  in Iskandar Malaysia,  particularly in the high-rise segment,  we believe this project will only be rolled out in 2HCY14 when demand recovers.

Source: RHB