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IOI Corp Bhd (fundamental: 1.7; valuation: 2.1) had sparked excitement among investors when it announced the relisting of its property arm IOI Properties Group Bhd in May 2013.

IOI Properties (fundamental: 1.35; valuation: 1.8) made an impressive debut on Bursa Malaysia on Jan 15, 2014, surging to an intra-day high of RM3.21.

However, the upward momentum was not sustainable. IOI Properties’ share price has been on a downward slope since then. It closed at RM2.09 last Thursday, down 16.7% from its initial public offering price of RM2.51 and 34.9% from its peak of RM3.21.

The rather big drop in share price, however, has yet to whet investors’ appetite, against the backdrop of the soft sentiment on property stocks. In addition, IOI Properties’ earnings have fallen short of analysts’ expectations.

“We wouldn’t say so (attractive investment) because it is not only IOI Properties that is cheap. Other property stocks are cheap, too,” says RHB Research analyst Loong Kok Wen.

 “Perhaps it is not the right time to look at property stocks. If you buy, you may have to hold them for six months before you see any price movement.”

IOI Properties’ net profit came in lower in the second quarter ended Dec 31, 2014 (2QFY2015), although revenue was higher. Net profit fell 6.6% to RM280.3 million from the previous corresponding period, but revenue grew 14.2% to RM448.3 million.

News on IOI Properties not pursuing the proposed RM2.74 billion acquisition of a 37.17% stake in Taipei Financial Center Corp (TFCC) — the owner of the iconic Taipei 101 skyscraper — has also dashed hope that the group might soon find a new income stream.

Both Kenanga Research and TA Securities have trimmed their earnings forecasts after the review on IOI Properties’ 2QFY2015 earnings.

Kenanga Research analyst Sarah Lim has revised downwards her earnings forecast for FY2015 ending June 30 and FY2016 by 4% and 10% respectively, following the termination of the share sale agreement with TFCC.

TA Securities analyst Thiam Chiann Wen cut her earnings forecasts for the group in FY2015 by 8%, after imputing higher effective tax rates of 30% to 31% in her calculations, compared with 24% to 25% previously.

Lim says the revision was made because the previous forecasts had factored in potential earnings contribution from TFCC. She estimates IOI Properties’ net profits in FY2015 and FY2016 at RM592 million and RM439 million respectively.

When contacted by The Edge on new plans ahead, IOI Properties declines to give details, saying that it has “no special announcement on new developments” at this point in time.

RHB Research’s Loong says IOI Properties’ next quarterly earnings could be within or slightly below her expectation.

She maintains her full-year earnings forecast of RM470 million for FY2015 as she believes the group’s sales target of RM2 billion is still achievable. This forecast is higher than her estimate for the previous financial year of RM425 million, implying a growth of 10.6%.

She says the group’s earnings will be driven largely by phase 1 of its Bandar Puteri Bangi project, which has a gross development value of RM608 million. The GDV of the entire project is RM4 billion.

“The RM2 billion sales target is still okay. It is a decent number. The earnings have not come in yet, but it should show up in the second half of the year,” says Loong.

Bandar Puteri Bangi has achieved a take-up rate of more than 60% since its launch in January, according to Loong’s report last month.

Kenanga’s Lim concurs that the project could see strong sales numbers in the third quarter. “We gather that the project has achieved a 70% take-up rate,” she says in her latest report.

Apart from Bandar Puteri Bangi, analysts reckon earnings growth could also be driven by the group’s second venture in Xiamen, China — IOI Palm City.

TA Securities’ Thiam expects IOI Palm City to contribute to the group’s FY2015 and FY2016 sales.

Nonetheless, any earnings contribution from this project will depend on its successful launch.

“The key issue is whether it can be launched in time,” Loong says, adding that the project could generate sales of RM300 million to RM400 million.

Apart from property sales, IOI City Mall in Putrajaya, which commenced operations last November, could potentially be an earnings booster.

Loong says the shopping mall could generate an annual rental income of RM110 million, which translates into a net incremental value of RM50 million to RM60 million to IOI Properties’ bottom line.

“These figures are on the assumption that the mall has a 90% occupancy rate, which may not be the case in the first six months. We expect rental income to flow in materially in FY2016,” she adds.

As at 2QFY2015, IOI Properties recorded property sales of RM642 million, representing 32.1% of its sales target.

Will the stock reverse its downward trend? This will depend largely on whether the group can hit the RM2 billion sales target and how soon it can fill up the retail space in IOI City Mall.   


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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