IOI Properties relists as a stronger entity

AT a rare analyst and media briefing by IOI Corp Bhd on May 14 to announce the proposed relisting of its property arm, chairman Tan Sri Lee Shin Cheng reveals his passion for both the oil palm and real estate businesses.

"I like both very much, both [are] also my lovers," Lee replies when asked which of the two sectors he is most bullish on, drawing laughter from the audience.

While Lee is better known as a planter, he says he had dabbled in property early on, getting his first taste of property development when he planned housing for workers as an estate manager.

Lee's first foray into property came when he was still an estate manager for an oil palm plantation company.

"As an estate manager, you must know a little bit of everything — like housing, water pipes and electricity supply, among others. I learnt all these from my time in the plantations. I reached the point when I began to love these infrastructures.

"When I was still an estate manager, I used to buy old buildings, renovate them and then sell them, making some money for myself," he recalls.

Evidently, the experience cemented Lee's interest in the property sector and eventually led him to pursue it on a bigger scale through IOI Group.

After a four-year hiatus from Bursa Malaysia, IOI Corp's property business is making a comeback, this time as a much stronger entity boasting assets worth RM18.5 billion. The assets, comprising the group's property arm and its related subsidiaries worth RM18.2 billion, as well as properties belonging to the Lee family worth RM242 million, will be injected into IOI Properties Group Sdn Bhd (IOIPG), which will then be listed.

The exercise involves a restructuring that will streamline IOI Corp's property arm. IOI Corp will inject its property assets and related subsidiaries into IOIPG at RM12.68 billion and at the same time capitalise RM1.8 billion of inter-company debt into equity in the new entity. The Lee family's assets will be injected into IOIPG at RM196 million, bringing the exercise's total consideration to RM14.67 billion, to be satisfied with the issue of 3.287 billion IOIPG shares at RM4.46 apiece.

IOI Corp's shareholders will receive about 2.16 billion IOIPG shares free or one for every three IOI Corp shares held. Another 1.08 billion IOIPG shares will be offered to IOI Corp's shareholders in a non-renounceable restricted offer for sale (ROS) on the basis of one for six IOI Corp shares held. Lee will underwrite the IOIPG shares that are not subscribed for by shareholders in the ROS.

IOIPG is expected to make its debut on Bursa by mid-December this year.

Analysts say IOIPG will emerge as one of the largest property companies on the stock exchange with a market capitalisation of between RM8 billion and RM14 billion.

In 2009, just before IOI Properties Bhd was privatised, it had a market capitalisation of around RM1.8 billion.

With the demerger and relisting of the property outfit, the Lee family stands to own up to 46.19% equity interest in IOIPG, which is equivalent to 1.518 billion shares, through its 45.77% stake in IOI Corp and sale of interest in property subsidiaries. Based on the expected market cap of RM8 billion to RM14 billion, the Lee family's stake in IOIPG could be worth at least RM3.7 billion.

In the four years or so, the group's property arm has grown not just in value but also in geographical terms.

"Back then, IOI Properties was overshadowed by IOI Corp because the latter was doing very well … so much so that people forgot about the property business. In fact, over the last 10 years, IOI Properties' profitability has been the highest among the listed companies on the stock exchange. So now, I think it is time we shared it with IOI Corp's shareholders," Lee comments.

His son Datuk Lee Yeow Chor, who is executive director of IOI Corp, says the property arm will be relisted as a much stronger entity this time around, allowing shareholders to unlock the value within it.

IOI Corp has been investing in new land through its regional expansion in the last few years, he adds. This has already borne fruit with earnings increasing in the last three quarters.

Based on IOI Corp's cumulative operating profit for the six months ended Dec 31, 2012, its property division, which includes its property investment business, saw a 2.34% increase in profit to RM283.9 million from a year ago while revenue gained 19.8% to RM521.1 million.

Throughout the two-hour briefing, Lee, who likes to keep a low profile, is upbeat about the prospects for the property arm. He expects IOIPG's operating profit to reach RM1 billion per year within the next three years.

The group's landbank that is available for development is estimated at 10,000 acres, of which 400 acres are located in China and the rest in Malaysia. According to Yeow Chor, the total gross development value of the land over the next three years is expected to be around RM16 billion.

The group started an aggressive expansion of its regional property portfolio in 2007. In Singapore, its joint property development projects include the Pinnacle Collection @ Sentosa Cove, Seascape @ Sentosa Cove and Cityscape @ Farrer Park.

IOI Group's joint venture with City Developments Ltd to develop the South Beach project — a mixed-use development on a landmark site between Raffles Hotel and Suntec City — is expected to be completed by 2014.

The group also recently launched its Clementi condominium project in the city-state and plans to unveil its mixed-use development in Xiamen, China, soon.

IOI Corp rakes in about 50% gross development profit margins on its projects in Malaysia. As for its projects in Singapore and China, the company is estimating margins to be around 30% to 40%, depending on the location.

HwangDBS Vickers Research says in a report that the property outfit has a strong launch pipeline ahead. IOI Corp's potential sales of RM3 billion in FY2014 will be the second highest in the sector after S P Setia Bhd's targeted RM5 billion.

Be that as it may, not everyone was positive about the demerger. Both Standard & Poor's Rating Services and Moody's Investor Services lowered IOI Corp's debt rating as it would lose the benefit of diversification, with the group fully-exposed to the volatility in crude palm oil prices. Nevertheless, both maintained the outlook for IOI Corp at "stable”.

Meanwhile, Alliance Research believes IOI Corp will not see substantial earnings growth after the demerger unless it acquires more plantation land.

This story first appeared in The Edge weekly edition of May 20-26, 2013.

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