Acquiring Tropicana Gardens Mall for RM680mn

IOIPG is set to acquire Tropicana Gardens Mall (TGM) in Petaling Jaya for RM680mn from Tropicana Corporation Bhd (Tropicana). The seven-storey mall has a gross floor area of 2.95mn square feet and a net lettable area (NLA) of 1.05mn square feet, with an occupancy rate of 77%.

The acquisition provides an opportunity for IOIPG to have a presence in the Damansara/Petaling Jaya area. The mall is strategically connected to Surian MRT station and accessible via four major highways. Nearby amenities include Thompson Medical Centre, Tropicana Golf & Country Resort, and various educational institutions. Additionally, it serves the surrounding townships of Kota Damansara, Sunway Damansara, and Mutiara Damansara. The acquisition is expected to be completed by 1QCY25.

Expanding Its Hospitality & Leisure Segment

IOIPG has also announced the successful completion of two significant acquisitions from Tropicana: the 150-room W Kuala Lumpur (occupancy rate 78%), acquired for RM270mn, and the 199-room Courtyard by Marriott Penang (occupancy rate 82%), purchased for RM165mn. These acquisitions were completed on February 8, 2024, and July 22, 2024, respectively. With these additions, IOIPG's hospitality and leisure segment will see an increase from the current 2,356 room keys (including the joint-ventured JW Marriott Hotel Singapore) to a total of 2,705 room keys across all eight hotels – see Appendix 1 & 2. Including the two pipeline hotels currently under construction, IOIPG’s hotel room inventory is projected to reach 3,425 by 2028.

Besides this, IOIPG had, on June 28, 2024 entered into a conditional sales and purchase agreement with Pantai Kok Resort Development Sdn Bhd to buy 9.86 acres of freehold land in Pantai Kok, Teluk Burau in Langkawi for RM90.1mn. Note that Tan Sri Tan Chee Sing is the major shareholder of both Pantai Kok Resort Development Sdn Bhd and Tropicana. The acquisition is expected to be finalised by 4QCY24 and is intended for a new hotel development. Strategically located between Telaga Harbour Marina to the east and Berjaya Langkawi Resort to the west, the land is close to key attractions such as the Langkawi Skybridge Cable Car, Telaga Harbour Park, Langkawi Marine Park, and Skytrex Adventure Langkawi. Construction of the hotel is anticipated to begin in 2025 and be completed by 2028.

Our View

We view these acquisitions positively, as they align with the group’s growth strategy and enhance its footprint in both the retail and hospitality sectors.

The acquisition of TGM strategically complements IOIPG’s existing portfolio, including IOI Mall Puchong and IOI City Mall in largest mall in the country with a net lettable area (NLA) of 2.5mn square feet – see Appendix 4 for IOIPG’s existing retail assets. The inclusion of TGM will elevate the group's total retail NLA to 5.6mn square feet, significantly strengthening its market presence and operational capacity.

The acquisition price of RM680mn is notably below the mall's net book value of RM944m, representing a 28% discount. It also reflects a 10% discount from the RM690mn market value as appraised by CBRE WTW Valuation & Advisory Sdn Bhd, the independent property valuer appointed by the vendor. Since opening in March 2020, TGM has generally been loss-making, with the exception of FY21, when it reported a profit after tax of RM0.5mn. For FY23, the mall posted a loss after tax of RM16.0mn. Given these financials, we believe the acquisition price to be fair, considering that IOIPG may need to invest in capital expenditures to rebrand and reconfigure the tenant mix of the mall.

Separately, we are positive about the Langkawi land acquisition given the island’s robust tourism prospects. Data from the Langkawi Development Authority (LADA) highlighted a decrease in tourist arrivals during the pandemic, dropping from over 3.9mn visitors in 2019 to around 1.0mn in 2021. However, by 2023, numbers gradually increased to more than 2.5mn, partly attributed to the island welcoming five chartered flights from Chengdu and another five from Chongqing, China. For 2024, LADA targets 3.0mn arrivals, having already achieved 250,000 arrivals in January alone. The ratio of foreign visitors has also improved to 48% since January this year, up from 30% previously. We believe Langkawi's status as a duty-free island with attractive shopping destinations, rich history, and natural beauty makes it an ideal location for a new hotel development to attract both local and international visitors.

In terms of financial impact, we estimate the group’s net gearing will increase from 0.73x in 3QFY24 to 0.92x, assuming the acquisitions of Shenton House Singapore (RM3.5bn), TGM (RM680mn), and the Langkawi land (RM90.1mn) are financed entirely through debt.

In this context, we believe IOIPG is poised to establish a Real Estate Investment Trust (REIT), given its increasingly mature investment properties portfolio. While specific timelines and details regarding the REIT's IPO are not available, the carrying value of IOIPG's investment properties stands at RM18bn, according to the FY23 annual report. By creating a REIT, IOIPG can unlock value from its investment properties, reduce debt, and improve its balance sheet, thereby mitigating the impact of these acquisitions on its net gearing ratio.

Forecast

Maintain earnings forecasts pending the completion of these acquisitions.

Valuation

We maintain our Buy recommendation on IOIPG with an unchanged target price of RM3.10/share. Our valuation is based on P/Bk multiple of 0.7x against its CY25 BPS, slightly below the stock’s peak valuation of 0.71x since its listing in 2013 and a 3% ESG premium incorporated into our TP.

Source: TA Research - 24 Jul 2024