Review

• Excluding foreign currency translation loss on foreign denominated borrowings and deposits of RM31.9mn, fair value gain on investment properties of RM93.4mn and share of impairment loss of RM42.8mn in a joint venture's development property, IOIPG reported normalised net profit of RM642.6mn in FY19. Results were below expectations, only accounted for 81% and 89% of ours and consensus’s fully-year earnings forecasts. The variance was largely due to lesser-than-expected new launches in China as well as lower sale of completed properties in Singapore.

• An interim single tier dividend of 3.0sen/share was declared (FY18: 5.0sen/share), also came in below our dividend projection of 5.0sen/share. Representing a payout ratio of 26% (FY18: 50%), it translates to a yield of 2.8% based on last closing price.

• YoY, FY19 revenue declined 18% YoY to RM2.2bn largely due to lower contribution from the property development division. However, FY19 normalised net profit was only marginally lower by 0.1% YoY to RM642.6mn, boosted by higher EBIT margin (+13%-pts to 40%) and higher share of profit in joint ventures (JVs) mainly arising from the sale of South Beach Residences in Singapore. We understand that the higher margin was contributed by higher revenue recognition from China projects.

• Excluding exceptional items amounting to RM26.4mn for the quarter, IOIPG reported normalised net profit of RM113.2mn in 4QFY19, which was 34% lower on a QoQ basis. The group posted lower sequential profit as it recorded a RM21.3mn share of loss of JVs vs a profit of RM80.9mn in the immediate preceding quarter.

• IOIPG’s 4QFY19 new sales grew 34% YoY and 57% QoQ to RM550mn. This brought the FY19 sales to RM1.93bn (+2.7% YoY). Of the RM1.93bn new sales, 58% were derived from Malaysia, 39% from China and 3% from Singapore (as compared to Malaysia: China: Singapore, 61%: 9%: 30% in FY18). Unbilled sales decreased to RM609.7mn as at Jun-19 as compared with RM637.9mn a quarter ago.

Impact

• We adjust our property sales and progress billings assumptions to reflect the actual FY19 results. Our FY20 and 21 sales assumptions are RM2.0bn and RM2.2bn respectively. All in, we cut our FY20 and 21 earnings by 22% and 19% respectively as we assume 1) lower sale of completed units in Singapore, 2) lower sales contribution from China. We also cut earnings contribution from the property investment and leisure division as we now assume lower rental/average daily room rate growth of 0 – 2% rental growth (previous 3% – 8% growth) and lower average occupancy rate of 65%-68% (from 70% previously).

• We also cut our FY20/21 dividend assumptions lower to 3sen/share from 5sen/share previously, based on payout assumptions of 23% - 26%.

• We introduce FY22 net profit forecasts of RM732.7mn (+13% YoY) with a sales assumption of RM2.4bn (+9.4% YoY).

Outlook

• While there is no official sales target set for FY20, management intends to benchmark it with the sales numbers achieved in FY19 and continues to strive for better sales performance. Management expects property sales to be mainly derived from bread and butter townships such as Bandar Puchong Jaya, Bandar Puteri Puchong, 16 Sierra, Bandar Puteri Bangi, Kota Warisan and IOI Resort City as well as Bandar Putri Kulai in Johor. Meanwhile, management also anticipates 2 projects in Xiamen (planned launches of RMB2.9bn) to drive FY20 sales performance.

Valuation

• Post earnings revision, we lower our target price to RM1.40/share (previous RM1.79/share), based on a lower target average blended CY20 PE/PB of 9x/0.5x (previous CY20 PE/PB of 10x/0.6x). Given the stock’s sizable exposure to China market (20% of our projected FY20-22 sales are derived from China), we lower our target multiples as we see rising concerns over US-China trade tension could dent investors’ sentiment on the stock. Nevertheless, we believe the recent weakness in IOIPG’s share price (-28% in past 6 months) has already priced in the negative news. Hence, maintain our Buy recommendation. Note that, IOIPG remains one of the most efficient developers in Malaysia that is able to conserve its gross margin above 40%.

Source: TA Research - 30 Aug 2019