Initiating Coverage, 9 January 2014 IOI Properties Group (IOIPG MK) Buy Property - Real Estate Oper & Svcs Target Price: MYR3.50 Market Cap: USD2,464m Reference Price: MYR2.51 Macro Risks 3 Coming Back With a Bang Growth . 3 0 Value . 02 0 . 03 0 We initiate coverage on IOIPG with a BUY rating and MYR3.50 FV. 0 IOIPG’s massive township developments – a segment less vulnerable to 0 sector cooling measures – will provide the company with sustainable 0 sales. IOI’s backing has benefitted IOIPG, with an easier source of landbank and high margins for property developments. Future value will be unlocked via a pool of investment assets worth >MYR2bn. A successful township developer. IOIPG is one of the largest listed developers in Malaysia. Almost all of its local projects are township developments – an important factor as demand for landed properties is typically more resilient. This segment is also less sensitive to the recent regulatory changes. IOIPG has MYR26bn worth of projects in the Klang Valley and Johor alone, representing almost 50% of total GDV. Overseas projects provide diversification. Overseas projects in Xiamen, China, and Singapore give IOIPG the flexibility to be responsive to changes in market conditions. The debut of the Xiamen project was successful, with all 480 units launched in Sept 2013 taken up. Earnings from China are expected to kick in from FY14 onwards. Backing of IOI means easier source of landbank. Another competitive advantage that IOIPG has over its peers is the backing of a strong parent company, IOI Corp (IOI MK, BUY, FV: MYR4.83) – a plantation company with 163,000ha of oil palm land in Malaysia. IOIPG has sourced landbank from IOI in the past and, due to the cheap land cost, Avg Turnover (MYR/USD) m/m the former’s gross margin is higher at 56-60% vis-à-vis peers 25-30%. Cons. Upside (%) na Upside (%) Further value unlocking potential via property investment assets. 52-wk Price low/high (MYR) - IOIPG has accumulated almost MYR2bn worth of property assets and Free float (%) 50 will add more to the pool, given its pipeline developments such as IOI City Mall, South Beach and Xiamen malls and offices. An asset monetisation exercise is expected in 3-5 years’ time. Shareholders (%) Tan Sri Dato’ Lee Shin Cheng * 44.9 Expect double-digit earnings growth. We expect FY14-15 earnings to grow at 13-15% per year, on the back of MYR1.2bn worth of unbilled sales and MYR20bn development GDV over the next three years. * Based on IOI’s latest shareholding BUY; FV at MYR3.50. Given IOIPG’s MYR8.1bn market cap at listing, Shariah compliant the company is qualified to be on investors’ radar screens. We initiate coverage on IOIPG with a BUY rating and MYR3.50 FV. Forecasts and Valuations Jun-11 Jun-12 Jun-13 Jun-14F Jun-15F Total turnover (MYRm) 1,171 1,052 1,323 1,579 1,883 Recurring net profit (MYRm) 725 600 694 786 901 Net profit growth (%) 3,186.8 (17.3) 15.6 13.3 14.7 EPS (MYR) 0.22 0.19 0.21 0.24 0.28 Loong Kok Wen CFA +603 9207 7614 DPS (MYR) 0.00 0.00 0.00 0.02 0.03 [email protected] Dividend Yield (%) 0.0 0.0 0.0 0.8 1.2 Return on average assets (%) - - 11.6 6.3 6.7 Return on average equity (%) - - 13.4 7.3 7.9 P/E (x) 11.2 13.6 11.7 10.3 9.0 P/B (x) - - 0.79 0.74 0.69 Net debt to equity (%) - - 1.2 Net cash Net cash Note: Based on MYR2.51 reference price Source: Company data, RHB estimates See important disclosures at the end of this report Powered by EFATM Platform 1 IOI Properties Group (IOIPG MK) 9 January 2014 Grown Bigger The history IOIPG is coming back in a bigger way with a larger market cap of about MYR8.1bn (based on a reference price of MYR2.51) vs MYR1.5-2bn prior to its delisting in 2009. The company was privatised four years ago as part of its efforts to pursue various landbank acquisitions. The stock was also fairly illiquid back then. During the period when it was solely held under IOI, IOIPG aggressively expanded, both locally and overseas. Today, IOIPG has a net asset base of MYR10.6bn (Sept 2008: MYR3.2bn) and a landbank size of about 14,000 acres, including 10,000 acres of development land, compared with about 5,000 acres previously. Experienced management team. Tan Sri Dato’ Lee Shin Cheng’s youngest son, Mr Lee Yeow Seng, has been appointed as IOIPG’s CEO. Prior to this, he was actively involved in corporate affairs and general management within the IOI group. Lee holds an LLB (honours) from King’s College London. IOIPG is led by a team of professionals – most of which are long-serving staff in IOIPG/IOI. Mr Teh Chin Guan is the property director. Before joining IOI in 2006, he held various senior positions in Berjaya Land (BL MK, NR). Teh now heads the day-to-day operations in the Klang Valley and participates in business planning with other directors. Ms Lee Yoke Har is the senior general manager of marketing and business development. She joined IOI as a legal executive in 1996 and was subsequently transferred to the property division. Lee is responsible for managing and implementing marketing and sales strategies for Klang Valley projects and overseeing the leasing and management of IOIPG’s investment properties. The board of directors of IOIPG consists of: i. Tan Sri Dato’ Lee Shin Cheng – executive chairman ii. Dato’ Lee Yeow Chor – executive director iii. Mr Lee Yeow Seng – executive director iv. Tan Sri Ong Ka Ting – senior independent non-executive director v. Dr Tan Kim Heung – independent non-executive director vi. Datuk Tan Kim Leong – independent non-executive director vii. Datuk Lee Say Tshin – independent non-executive director Overview of IOIPG IOIPG has four divisions: i) property development, ii) property investment, iii) leisure & hospitality – golf courses and hotels, and iv) plantations. The property development and investment divisions are the key earnings contributors, making up more than 90% of group profits. To date, IOIPG has a landbank size of about 14k acres, carrying a total GDV of over MYR50bn, based on our estimates. According to the management, the development GDV over the next three years amounts to MYR20.2bn (some land parcels have no development plans as yet). While exposure to the overseas market is minimal in terms of landbank size, the contribution is more material by GDV, ie local:overseas is equivalent to 57%:43%. Locally, most of IOIPG’s existing projects are located in the Klang Valley (Puchong) and Johor (Kulai). Prior to its listing, the internal restructuring exercise within IOIPG has seen the injection of new sizeable land parcels in Segamat and Tangkak (both in Johor) and in Bahau, Negeri Sembilan. Based on the latest FY13 numbers, almost 100% of the company’s topline comes from operations in Malaysia. Given its joint venture (JV) stake in projects in Singapore, earnings from these projects kick in only at the associate level. IOIPG will have a share base of about 3.2bn. Upon listing, IOIPG’s market cap could potentially surpass that of UEM Sunrise (UEMS MK, NEUTRAL, FV: MYR2.73). In terms of landbank size, total portfolio GDV and earnings base, the company is certainly comparable to top peers in the industry. Hence, it should be on investors’ radar screens for property exposure. Shareholding of the major shareholders post listing has yet to be confirmed, but Tan Sri Lee’s shareholding will likely be around 45%. See important disclosures at the end of this report 2 IOI Properties Group (IOIPG MK) 9 January 2014 Figure 1: Portfolio exposure by GDV Figure 2: Landbank exposure by region China Xiamen Singapore China Xiamen Klang Valley 5.7% 0.1% 0.4% 13.8% Klang Valley 26.9% Singapore 36.8% Johor Others 28.0% 57.7% Johor 22.0% Others 8.6% Source: Prospectus Source: Prospectus Figure 3: Revenue breakdown by division Figure 4: GP breakdown by division Plantation, Others, 1.4% Others, 1.0% Leisure & Plantation, 2.1% Leisure & 1.9% Hospitality, Hospitality, 6.6% 5.4% Prop. Invt, 8.0% Prop. Invt, 9.9% Prop. Dev, Prop. Dev, 82.5% 81.2% Source: Prospectus Source: Prospectus Figure 5: Ranking of top property developers Company Landbank (acres) Total GDV (MYR m) Market cap (MYR m) UEM Sunrise 12,561 81,154 10,754 IOIP ^ 14,081 52,734 8,130 SP Setia 5,384 98,670 7,106 Sunway 3,850 54,400 4,791 IJM Land 5,850 37,500 4,022 Mah Sing 1,500 16,191 3,195 UOAD 220 17,800 2,504 Market cap as at 8th Jan 2014 ^ Based on reference price at MYR2.51 Source: Company data See important disclosures at the end of this report 3 IOI Properties Group (IOIPG MK) 9 January 2014 Investment thesis At a MYR2.51 reference price, we see upside in the stock. The key four angles are: i. Township developments ensure sustainable demand and hence earnings ii. Overseas ventures providing diversification iii. The backing of IOI means an easier source of landbank iv. Further value-unlocking via property investment assets A successful township developer. IOIPG has about MYR26bn worth of ongoing and new township projects in the Klang Valley and Johor alone, making up almost half of the total portfolio GDV.