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Analysts neutral on IOI's Singapore property moves

KUALA LUMPUR: IOI Corp Bhd ended trading eight sen lower on Monday, Apr 11 at RM5.57 on a volume of 4.12 million shares, as investors and analysts weighed in on the plantation heavyweight upping its stake in a major property project in Singapore called South Beach.

Most research houses left their calls on IOI unchanged, although some were wary of the group's sizeable equity investments involved in the South Breach project, which could total RM1.96 billion.

Some, like RHB Research Institute and Maybank IB Research, noted that the development costs of the project had not been made known yet.

"Without further details, we are unable to gauge the impact on earnings which will filter in, at the earliest, when the development starts," said Maybank IB Research. However, we estimate that every 10% return on investment by IOI will enhance valuations by three sen."

Maybank estimated that the immediate cash outflow by IOI to raise its stake in the Singapore property project would amount to RM759 million.

"IOI has a net debt of RM1.28 billion (0.12 times net gearing) as at Dec 31, 2010. We estimate net gearing to rise to 0.18 times immediately and to 0.29 times subsequently," it said, adding that IOI's total investment in the project would amount to a hefty RM1.96 billion, including the acquisition of the stake in Scottsdale Properties Ltd, which holds interests in the South Breach project, loans to Scottsdale and further contribution for working capital.

According to Bloomberg, of all the brokers that issued a report on the counter on Monday following the latest development, five had "hold" calls, three called for a "buy" while two had "underperform" calls. All the calls were maintained from earlier recommendations.

To recap, after market close last Friday, IOI announced that its subsidiary IOI Consolidated (S) Pte Ltd would effectively increase its stake in South Beach Consortium Pte Ltd, the vehicle for the project, to 49.9% from 33.3% when it was mooted in November 2010. The remaining 50.1% in the South Beach project is held by City Developments Ltd (CDL).

The more aggressive move into property development comes on the back of an eventful period for IOI last week, which saw its certification from the Roundtable on Sustainable Palm Oil (RSPO) suspended following complaints which included disputes over native customary land.

"We are not surprised by IOI's latest move [going deeper into property project in Singapore], given its healthy balance sheet and its plan to expand its property development division overseas," said Hong Leong Investment Bank (HLIB) Research in a note on Monday.

While it was of the view that the valuations paid by IOI to increase its interest in the South Beach project were not excessive and the location of the iconic project would be strategic, HLIB Research said it was neutral on the development as the Singapore government had introduced measures to cool the property sector, which would in turn affect demand and thus the pricing of the development.

In a sector update on the Singapore property market, CIMB Research said it believed a rise in interest rates was inevitable as the three-month Sibor (Singapore interbank offered rate) was at a record low.

"[A rise in rates] will reverse conventional trends for physical prices [of property], through the impact on debt-servicing ability (especially for those with multiple home loans) and lower rental carry," it said.

In a separate report, CIMB Research raised concerns over the dilutive effect of IOI's Singapore property venture on its price-earnings rating, in addition to the subdued outlook on the market as well as "IOI's mixed track record in Singapore properties".

However, the research house said it felt the strategic partnership with CDL was positive, adding that it expected earnings enhancement given the relatively attractive investment cost.

"The acquisition [of Scottsdale Properties to increase its interests in the South Beach project] will add to the group's property portfolio in Singapore, which now includes its joint-venture with Singapore's Ho Bee group for two condo developments in Sentosa Cove and the development of a condo project in Balestier," CIMB said.

Of late, IOI's share price has been weighed down by a variety of factors, including the fact that most of its plantations are mature with no newly maturing estates, its forward-selling of palm oil and decline in production.

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