IOI Properties Group Bhd
(Nov 11, RM2.56)
Maintain “neutral” with lower target price of RM3.10: We are neutral on IOI Properties Group’s (IOI Properties) equity fund-raising exercise, as the dilution impact on revalued net asset valuation and earnings could be mitigated once new land bank is secured and/or IOI City Mall Putrajaya is revalued.

IOI Properties announced its proposed rights issue exercise on the basis of one rights share for every six existing shares at an issue price of RM1.90 per rights share to raise RM1.03 billion. It also proposes an employee share option scheme of up to 10% of the enlarged share capital.

Fifty per cent of the proceeds will be used to fund the development of investment properties, which should enhance the assets’ future value.

While the market may be surprised by the fund-raising exercise, given that the company was only listed in January this year, with its current net gearing of only 13%, management indicates that no cash was raised during the initial public offering. Hence, financing is needed mainly for the construction of infrastructure and development of investment properties (RM500 million) such as IOI City Mall Putrajaya, and the offices and hotels in IOI Resort City. RM325 million is allocated for working capital, mainly for new township projects. The remaining RM200 million will be for future opportunities.

Equity funding is generally a preferred choice, especially in a rising interest rate environment.

The exercise is expected to be completed by the first quarter of 2015. As such, we lower our earnings per share estimate by 4% for financial year 2015 (FY15), and 14% for FY16 and FY17. — RHB Research Institute Sdn Bhd, Nov 11

This article first appeared in The Edge Financial Daily, on November 12, 2014.