IOI Properties Group Bhd (Nov 14, RM2.27)

Maintain neutral with an unchanged target price (TP) of RM2.65: IOI Properties Group Bhd announced that its wholly-owned subsidiary Wealthy Link Pte Ltd had successfully tendered for a parcel of leasehold land at Central Boulevard in Singapore’s Marina Bay measuring 1.09ha for a tender consideration of S$2.59 billion (RM7.77 billion). The land tender is expected to be completed in the first quarter of 2017.

The Central Boulevard white site is the first sale of land in Singapore’s Marina Bay in nine years. Marina Bay is Singapore’s premier financial and business district, while the land tendered by IOI Properties is strategically located within Marina Bay and the central business district (CBD) of Singapore. The bid price of S$2.6 billion for the plot translates into a bid price of S$1,689 per sq ft based on the total gross floor area (GFA) of 1.5 million sq ft. The bid price of S$1,689 per sq ft is 20% higher than the previous transacted price of S$1,409 per sq ft for the Asia Square Tower 1 site in 2007.

The developments to be undertaken on the land will be predominantly office buildings as the plot must have at least 70% of the GFA allocated for office use, less than 4% for retail use, and the remaining GFA for residential/commercial use. IOI Properties views the land tender as an opportunity to venture into prime office tower development in the CBD of Singapore. Nevertheless, we are neutral on the land acquisition as the near-term outlook for office property in Singapore appears to be challenging due to high office space supply coming up in 2018. Meanwhile, we gather that IOI Properties will most likely keep the office tower as investment properties, which we opine could be part of its long-term plan of realising the value of its investment properties by establishing a real estate investment trust.

The net gearing of IOI Properties is expected to increase substantially to 0.71 times post-completion of the land acquisition (currently at 0.23 times) assuming IOI Properties funds the land tender via 10% cash and the remaining 90% via borrowings. Note that the current net gearing of 0.23 times has already factored in the funding for its Xiamen land acquisition (announced in August) which has been completed recently. In this context, IOI Properties does not rule out the possibility of undertaking an equity fundraising exercise in the future to pare down its borrowings.

We maintain our earnings forecast for financial year 2017/2018 (FY17F/FY18F) as earnings contribution from the project is expected to kick in upon completion of the office towers estimated from 2022. We maintain a TP of RM2.65 for IOI Properties  pending information on the official gross development value of the project. Our TP is based on a 40% discount to fully diluted revised net asset value. — MIDF Research, Nov 14

This article first appeared in The Edge Financial Daily, on Nov 15, 2016. Subscribe to The Edge Financial Daily here.

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