IOI Properties Group Bhd (Aug 4, RM2.40)

Initiate with neutral and a target price (TP) of RM2.65: IOI Properties Group Bhd (IOI Prop) is the largest listed property developer in Malaysia by market capitalisation. Note that its market cap of RM10.5 billion is higher than S P Setia Bhd’s RM8 billion. IOI Prop is a potential beneficiary of the mass rapid transit 2 (MRT2) project as one of the MRT 2 stations will be located in its township project — 16 Sierra. Meanwhile, IOI Prop should also benefit from the proposed Kuala Lumpur-Singapore high-speed rail (HSR) as one of the eight stations will be located in Ayer Keroh, where IOI Prop owns 1,338 acres (541.47ha) of landbank.

IOI Prop derives recurring income from investment properties by leasing out office buildings and retail space. Income from investment properties contributed to 14% of total operating profit in financial year 2015 (FY15). IOI Prop is looking to increase the contribution from this division to more than 20% in future.

Meanwhile, we understand that IOI Prop may look to list its investment properties as a real estate investment trust.

We believe IOI Prop is on track to hit its sales target of RM1.8 billion for FY16, as its property launches in China have achieved strong take-up rates. For FY17, IOI Prop is targeting to increase its property sales to RM2.3 billion, supported by overseas projects in China and Singapore. Earnings-wise, we estimate a core net profit growth of 16% year-on-year to RM666 million in FY16.

IOI Prop currently has five property projects in Singapore. We expect IOI Prop’s property sales in Singapore to be slow due to a challenging property market. We initiate coverage on IOI Prop with a “neutral” recommendation and TP of RM2.65, based on a 40% discount to fully diluted revised net asset value. While we like the company as a successful township developer with sustainable income from investment properties, its exposure to the slowing property market in Singapore would partially hurt its outlook. — MIDF Research, Aug 4

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This article first appeared in The Edge Financial Daily, on Aug 5, 2016. Subscribe to The Edge Financial Daily here.

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