IOIPG's 1QFY25 results were below expectations as core net profit fell 60%. The bright spot was the good response to its high-value projects in Singapore, while its property investment and hospitality assets are fetching decent yields. We cut our FY25F and FY26F earnings by 11% and 6%, respectively. We maintain our UNDERPERFORM call with a slightly lower TP of RM1.67 (from RM1.71) on RNAV updates.

Its 1QFY25 core net profit of RM511.6m came below expectations, making up only 11% and 10% of our full-year forecast and the full-year consensus estimate, respectively. The negative deviation against our forecast came largely from a softer-than-expected Malaysian property development segment with slower demand for its completed China properties.

YoY, its 1QFY25 revenue rose 6% driven mainly by improved performance of the property investment (+52%) and hospitality leisure segment (+127%), which offset the lower contribution of the property development segment (-22%). However, its core net profit was weighed down by interest expense amounting to RM97.1m for its IOI Central Boulevard project in Singapore since April 2024.

QoQ, its 1QFY25 revenue declined 12% from lower contribution from property development. However, core net profit saw a significant rise of RM69.2m (from 4QFY24 CNL of RM4.5m) after adjusting for one-off impairments and revaluations, thanks to better margins from its non- property development arms.

The key takeaways from its results briefing are as follows:

1. Its key focus for FY26 is to launch Marina View Residence in Singapore. Its sales gallery is under construction with focus on initiating the property's launch, with expectations of long-term earnings.
2. IOI Central Boulevard is expected to obtain the final phase of its Temporary Occupation Permit, allowing tenants to begin renovations by then, and the group has already secured leases with prominent international companies across various sectors, including technology, financial services, asset management, FMCG, and legal firms, achieving nearly 50% tenancy. The main priority is completing construction and enhancing the project's occupancy rate, as increased tenant uptake will drive earnings. The construction phase is expected to span about 3-4 years, supporting long-term revenue growth.
3. The occupancy rate at IOI City Mall remains impressive, averaging 96% across the group's entire mall portfolio. Currently, thorough market analysis is underway to avoid oversaturation from excessive retail space.
4. In the hospitality and leisure segment, the group continues to leverage on tourism activities, bolstered by the addition of the Moxy Hotel and W Kuala Lumpur in CY24. These new properties have enriched the group's portfolio, boosted occupancy rates, and reinforced its market position in key tourist hotspots.

Forecasts. We cut our FY25F and FY26F earnings by 11% and 6%, respectively, to account for a softer property development arm as operating margins will likely stay sluggish. For the near-term, it would be compensated by better performance in its investment and hospitality units.

Valuations. Against our unchanged discount to RNAV of 65%, our TP is slightly lowered to RM1.67 (from RM1.71) as we tweak our RNAV inputs, namely book value. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like IOIPG due to: (i) its focus on high-value products in matured townships with its well-diversified products, (ii) its expanding investment property portfolio which provides recurring incomes, and (iii) its presence in the vibrant property sector in Singapore. However, due to its presently rich valuations amidst near-term headwinds, we believe its risk-reward is unfavourably skewed at the moment. Maintain UNDERPERFORM.

Risks to our call include: (i) a stronger-than-expected recovery in the property market in China, (ii) mortgage rates ease, boosting affordability, (iii) benign construction cost, and (iv) good management of risks associated with overseas operations.

Source: Kenanga Research - 26 Nov 2024