Review

• Excluding the gain on disposal of land amounted to RM27.7mn, IOIPG’s 1HFY17 normalised net profit of RM435.4mn came in above our expectations but met consensus estimates. The results accounted for 59% and 55% of ours and consensus full-year estimates respectively. The variance was largely due to 1) stronger-than-expected progress billing from its on-going projects and 2) lower-than-expected effective tax rates.

• 1HFY17 normalised net profit grew 50% YoY to RM435.4mn, on the back of 41% growth in revenue. Property development division’s 1HFY17 revenue and operating profit surged 46% and 26% YoY to RM1.9bn and RM561mn respectively, driven by increasing progress works from all ongoing projects in Malaysia, coupled with higher property sales achieved in Singapore and townships in Malaysia. Property development division operating margin contracted 4.7ppt YoY to 30.1% in 1HFY17, largely due to higher revenue contribution from overseas projects that have lower margins as compared to its Malaysian projects.

• Property investment division registered better performance in 1HFY17, with revenue and operating profit advanced 15% and 28% YoY to RM149mn and RM86mn respectively. The improved results were mainly contributed by IOI City Mall which recorded higher average occupancy rates and an upward rental rate revision upon tenancy renewal during the period under review.

• Meanwhile, the hospitality division’s 1HFY17 revenue and operating profit collectively surged 16% and 32% YoY to RM80mn and RM14mn respectively. The better performance was largely due to contribution from Fourpoint Sheraton Hotel and Le Meridien Hotel by Starwood, Putrajaya which commenced its business operation in Aug 2016.

• 2QFY17 normalised net profit increased by 30% QoQ to RM245.8mn. Key operating divisions such as property development, property investment and leisure & hospitality division also reported stronger sequential profits during the quarter under review.

• IOIPG recorded new property sales of RM795mn in 2QFY17 (+8.9% QoQ, +4.6% YoY), bringing the 1HFY17 sales to RM1.5bn (+43% YoY). Of the RM1.5bn new sales, 42% were derived from Malaysia, 13% from China and 45% from Singapore (as compared to Malaysia: China: Singapore, 53%: 37%: 10% in 1HFY16). The significant improvement was largely driven by recovery in sales of Trilinq project in Singapore with 176 units sold in 1HFY17 (vs 120 units sold in FY16). Unbilled sales inched to RM1.62bn (from RM1.5bn a quarter ago) as at Dec-16, providing the group with about one-year earnings visibility.

Impact

• We revise our FY17/18/19 earnings forecasts higher by 11%/3%/1% respectively after factoring in 1) change in progress billings assumptions, and 2) lower effective tax rate of 35% from 38% previously. Nevertheless, we are keeping our FY17/18/19 sales assumptions unchanged at RM2.4bn/RM2.7bn/RM2.7bn respectively for now.

Outlook

• Management maintains its FY17 sales target at RM2.3bn, driven by bread and butter townships such as in Klang Valley and Johor, as well as projects in overseas. We believe the group is on track to deliver its sales target of RM2.3bn given it has scheduled launches worth >RM1.0bn for 2HFY17, and YTD sales already accounted for 66% of the sales target.

• Near-term earnings visibility is expected to be underpinned by: 1) unbilled sales of RM1.6bn and 2) additional recurring income from newly completed investment properties such as PFCC office tower 4 and 5 in Bandar Puteri Puchong, and IOI City Office Towers and Le Meridien Hotel in Putrajaya.

• The group has proposed a 1-for-4 rights issue at RM1.38/rights share which is expected to raise RM1.5bn. Targeted for completion in Mar-17, the cash proceeds will largely be utilised for the proposed acquisition of Central Boulevard land in Marina Bay Singapore for SGD2.6bn (or RM7.96bn). We see the group’s frequent equity raising exercise to dampen investors sentiment given the immediate earnings dilution. In view of jittery global economy outlook, we are also concerned on the timely launch of Central Boulevard project in Singapore. As such, we do not discount further needs in equity raising in view of heavy capital expenditure requirement for Central Boulevard development, if the sales performance, occupancy and rental rates are weak.

Valuation

• Target price is revised higher to RM2.26/share (ex-rights TP: RM2.10/share), based on unchanged target CY17 PER of 14x. We reckon that the group’s recent quarterly sales and profit growth has been impressive. However, we are incline to rate IOIPG a Hold (upgraded from Sell) for now as the group’s frequent cash call and the perception of overpaid land deals may continue clouding investors’ confidence in the stock.

Source: TA Research - 22 Feb 2017