This article first appeared in The Edge Financial Daily on April 8, 2019

IOI Properties Group Bhd
(April 5, RM1.33)
Maintain buy with a target price (TP) of RM1.84: IOI Properties Group Bhd’s (IOIPG) management expects the property market environment to remain challenging in 2019. IOIPG is also tweaking its marketing strategies and introducing more attractive packages to sustain earnings through “stock clearing” of completed and ongoing projects. IOIPG’s latest inventories stand at RM2 billion. About half of the total inventories were units completed during financial year 2018 (FY18).

Under its IOI Free Ownership campaign, buyers can now enjoy savings of up to RM161,000 (Muse by The Sky condominiums, Bandar Puchong Jaya), stamp duty exemptions and rebates. Via social media and digital platforms, the public can act as “special marketing agents” for the group and every successful referral will receive attractive referral incentives. While such schemes could result in some margin erosion, we believe it is vital to realise cash flows from these inventories for future working capital purposes.

Despite the challenging market environment, management continues to guide for a better FY19 and expects sales this financial year to come within the range of RM2 billion to RM2.2 billion (6% to 17% growth year-on-year). First-half of FY19 sales of RM1.03 billion accounted for about 50% of our full-year sales assumption of RM2 billion. Over in Singapore, City Developments Ltd and IOIPG (a 50.1%:49.9% joint venture) have launched the exclusive 190-unit South Beach Residences in September 2018. The sales performance has been encouraging, with 53 out of 75 units released sold. This includes the 6,728-sq ft super penthouse, which was sold for S$26 million (RM78.5 million). Management also anticipates two projects in Xiamen (planned launches of RM1 billion) to drive its FY19 sales. The launch of IOI Palm City (gross development value: 700 million yuan [RM426.18 million]) at end-August 2018 has seen a strong response with a 96% take-up rate to date. Meanwhile, the group plans to roll out the maiden phase of the Xiang An project by end-fourth quarter of FY19 (4QFY19) or 1QFY20.

With the occupancy rate of IOI City Mall reaching 99%, IOIPG has started the second phase of development. The net lettable area will increase by another one million sq ft to 2.5 million sq ft. Moxy Hotel, Marriot International’s experiential hotel brand, will also make its debut in IOI City Mall’s Phase 2. IOI City Mall’s Phase 2 is expected to be completed in 2022. As for the Central Boulevard development in the Marina Bay Financial Centre, Singapore, pilling work has started since February 2018 and the main building construction is expected to commence soon (mid-2019), on track for completion by 2022.

As for the group’s operation in China, the construction of a shopping mall, hotel, boutique offices, shoplots and shophouses within IOI Palm City is ongoing, with scheduled completion in 2020/2021. Once completed, IOI Palm City will add over two million sq ft of commercial space and about 300 rooms to IOIPG’s portfolio. We have made no change to our FY19 to FY21 earnings forecasts. Our FY19/FY20/FY21 new sales assumptions are RM2 billion/RM2.4 billion/RM2.5 billion respectively. Meaningful contributions from new investment properties and hospitality assets will only kick in beyond 2020. Rolling forward our valuation base year to calendar year 2020 (CY20), we arrive at a new TP of RM1.84 per share based on an average blended CY20 price-earnings ratio (PER)/price-to-book (P/B) ratio of 10 times/0.6 times.

IOIPG is trading at a CY20 PER and P/B ratio of 8.8 times and 0.4 times respectively, a steep discount to its five-year average forward PER and P/B ratio of 13.1 times and 0.6 times respectively. Against its larger peers, IOIPG’s PER and P/B ratio appear undemanding, below the peers’ average of 11.9 times and 0.7 times respectively. We like IOIPG as a developer with greater flexibility in terms of product offering and pricing. Potential derating catalysts include unexpected tightening of monetary policies and prolonged weakness in consumer confidence — key downside risks to our recommendation. — TA Securities, April 5