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IOI Properties has enough to weather the storm

IOI Properties Group Bhd (July 10, RM1.84)

Upgrade to buy with a target price (TP) of RM2.27: We met up with the management of IOI Properties recently and walked away feeling positive. Following are the salient points from the meeting.

The company, well known for its township developments in the past, has been busy recently with its two big township developments in the Klang Valley: Bandar Puteri Bangi (gross development value [GDV]:RM4.8 billion) and Bandar Warisan Sepang (GDV: RM1.3 billion).

Phase 1 of Bandar Puteri Bangi (GDV: RM300 million) has received a take-up rate of 80% while Phase 2 (GDV: RM300 million), which was launched in May, has a take-up rate of 40% to 50%. Bandar Warisan, Sepang, which is close to Xiamen University, has a total GDV of RM1.3 billion and is ready to launch.

In China, IOI Properties is kept busy with its IOI Palm City Xiamen (GDV: 2.8 billion yuan or RM1.71 billion). Phase 1 was launched in May with a GDV of 550 million yuan and has sold 80%.

IOI City Mall in Putrajaya is 90% tenanted with an average rental of RM6 per sq ft. The company aims to increase income from investment properties from 15% of total income to 30% to 40% in future. Total mall and office net lettable areas (NLA) is expected to increase from 5.7 million sq ft in 2015 to 7.25 million in 2018 (27% increase).

We estimate its current unbilled sales of RM1.4 billion will translate into a net profit of close to RM400 million (in line with our earnings forecast of RM390 million) in financial year 2015 (FY15).

Going forward, we expect net profit to increase by 41% to RM552 million in FY16.

Backed by its solid balance sheet with net gearing of less than 0.1 times, the company is capable of raising its dividend payout while building land bank to sustain its property development.

Given its well-established track record in township development even in the midst of economic downturn (as seen in 1997/1998) and its solid balance sheet, we believe the company will be able to withstand current headwinds in the property sector.

This, plus its current valuation at deep discount to its net asset value of RM3.50 per share, we believe the stock warrants a rerating. We upgrade our recommendation to “buy” from “hold”.

Our TP remains unchanged based on unchanged 35% discount to revalued net asset value which provides 29% upside after a recent share price correction. We deem the current share price an opportunity for long-term investors to accumulate at deep value. — HLIB Research, July 10

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