• Downgrade to NEUTRAL from Buy, new MYR2.47 TP from MYR2.75, 10% upside with c.3% FY25F yield. We expect to see a potential change in IOI Properties’ capital structure if the company undertakes the whole development of Shenton House in Singapore. While we like the Shenton Way property, given its strategic location, total consideration cost that may amount to SGD1.014bn may bring its net gearing to 0.9x. Our TP is now based on a 55% discount to RNAV (from 50%).

• Proposal to IOIPG. IOIPG’s board of directors has received a letter of proposal from Group CEO and substantial shareholder Lee Yeow Seng to participate in the joint development of Shenton House in Singapore. Mr Lee, via his private company Shenton 101, successfully bid for Shenton House with a consideration of SGD538m in Nov 2023.

• Details of Shenton House. The property is located in Singapore’s central business district (CBD), which spans 3,377sqm and is zoned as “commercial” with a gross plot ratio (GPR) of 11.2. The current land lease of Shenton House has approximately 44 years left, with the potential to be extended to a fresh 99-year lease. Furthermore, according to Singapore’s CBD incentive scheme, Shenton House is eligible for a 25% bonus GFA which can be redeveloped into a mixed-use commercial project with residential redevelopment or a hotel at a GPR of 14. As such, Shenton House is earmarked for redevelopment into a fresh 99-year leasehold commercial development. The current additional existing capital commitment (excluding development costs) is SGD476m, including a land betterment premium, lease top-up premium, and transaction expenses. The proposal is valid for four months, and may be extended by another two months. Lee and his brother Dato’ Lee Yeow Chor have abstained from voting on the proposal.

• Reasonable valuations. The total cost of SGD1.014bn (SGD538m + SGD476m) works out to c.SGD1,900psf per plot ratio – which is considered reasonable when compared to SGD1,700psf per plot ratio for the Central Boulevard land acquired by IOIPG in 2016.

• Net gearing is already high. While it makes sense for IOIPG to take over the development of Shenton House – since it is strategically located between its IOI Central Boulevard office and upcoming Marina View Residences – we think this potential participation of Shenton House development may be too sizeable if IOIPG is to undertake the whole development on its own. Current net gearing stands at 0.74x, and the company has yet to launch its Marina View Residences, which has been re-designed to be an upmarket residential project with an indicative ASP of SGD5k psf. The project is slated to be launched by end-2024, and we expect take-up to be slow, given the premium pricing.

Source: RHB Research - 26 Jun 2024