Investment Highlights

• We maintain BUY on IOI Properties Group (IOIPG) with an unchanged RNAV-based fair value of RM2.83/share and neutral ESG rating of 3 stars .

• Our FV implies CY25F P/E of 16.5x, 2.5 standard deviation above its 4-year mean. We believe the premium to be justified given significant contributions expected from recurring income of IOI Central Boulevard upon its completion thi year. Additionally, the launches of its major projects in Singapore, namely Marina View Residences with a huge GDV of S$3.5bil (RM12bil) further support substantial earnings growth moving forward.

• IOIPG entered into a conditional SPA to acquire Tropicana Gardens Mall in Tropicana Indah, Petaling Jaya from Tropicana Corporation for RM680mil cash, expected to b completed in 1QCY25.

• The 4-year old mall has a 7-storey retail podium with 457 stores and 2,190 car park bays. It encompasses a gros lettable area of almost 3mil sq ft and is located on leasehold land expiring on 25 April 2106.

• The mall has a direct connection to Surian MRT station and is easily accessible via 4 major highways – New Klang Valle Expressway, North-South Expressway, Damansara-Puchong Expressway and Sprint Highway. Amenities close to the mal include Thompson Medical Centre, Tropicana Golf & Countr Resort and educational institutions, which lies within the vicinity of several matured premier townships such as Kota Damansara, Sunway Damansara and Mutiara Damansara.

• The occupancy of the mall is 77% based on 1mil net lettabl area. The announcement did not reveal the rental rate no financial performance of the asset. However, assuming an average gross rental rate of RM8 psf, and 10% net operating cost, we estimate a current net rental yield of 10% which translates to mild 2% annual accretion to FY26F earnings.

• We view the acquisition price as fair, transacted at a sligh discount to CBRE WTW’s valuation of RM690mil and 28% discount to net book value of RM944mil.

• Last month, Lee Yeow Seng, IOIPG’s group CEO with a 65.7% indirect equity stake, offered the company to participate in related-party joint-venture to redevelop Shenton House, commercial property at 3 Shenton Way in Singapore, which LYS successfully tendered for S$538mil (RM1.9bil) back in Nov 2023. Assuming redevelopment accounts for 30% o project value, we estimate that Shenton House’s gros development cost could reach SGD1.4bil (RM5bil).

• Together with the proposed acquisition of W Kuala Lumpur hotel in Jalan Ampang for RM270mil, Courtyard by Marriott Penang hotel in Jalan Macalister, Georgetown, Penang for RM165mil and 9.9-acre freehold land in Pantai Kok, Pulau Langkawi for RM90mil, the total cash outlay of RM5.2bil from these acquisitions and redevelopments will raise IOIPG’s end-FY25F net gearing from 0.69x to a high 0.92x vs. an average of 0.4x for the property developers under our coverage.

• Hence, while Tropicana Gardens Mall could provide an additional earnings accretive and recurring income stream, we are neutral on this development given the rising risks to balance sheet strength.

• Even so, the stock currently trades at a compelling CY25F P/E of 15x vs. its peers of 18x. We continue to like IOIPG for its:
  
  1) regional property development portfolio with a strong track record and successful real estate projects in Malaysia, Singapore (Sentosa Cove) and China (Xiamen),
  
  2) substantial contributions from recurring income of IOI Central Boulevard upon its completion in FY25F, along with launches of major projects in Singapore, namely Marina View Residences with a huge GDV of S$3.5bil (RM12bil), and
  
  3) promising growth prospects for its hospitality division, driven by the anticipated tourism resurgence in Malaysia. Additionally, we anticipate that the recent acquisitions of W Kuala Lumpur and the forthcoming addition of Courtyard by Marriott Penang from Tropicana Corp will further enhance the hospitality portfolio.

Source: AmInvest Research - 24 Jul 2024