HLIB Research PP 9484/12/2012 (031413) IOI Properties Group Bhd (BUY, EPS ) March 4, 2014 INDUSTRY: NEUTRAL Price Target: RM3.85 () COMPANY INSIGHT Share price: RM2.60 Six key re-rating catalysts Sean Lim Highlights . We recently met with management to obtain some updates [email protected] on its various development projects, and to seek more +603-2168 1161 earnings clarity. We came away feeling more reassured than ever of its prospects, and re-iterate our view that IOIP KLCI 1824.7 remains undervalued at this juncture. Expected share price return 48.3% Expected dividend return 1.7% . Major projects all on-track. IOIP’s Park Bo Bay @ Expected total return 49.9% Xiamen, China is doing well, but management concedes the Share price operating environment in Singapore remains challenging. In Malaysia, its major launches are in the hotspots of Southern (RM) (%) Klang Valley and Johor, and it is also developing 6.55m sft IOIPG (LHS) KLCI (RHS) of new investment property assets. 3.50 120 . Refining our earnings forecast. Following our visit to 3.00 110 management we have tweaked our earnings projections by 2.50 making our margin assumptions more detailed. Although 2.00 100 our FY14-15 net profit forecast is reduced by 25-34%, we 1.50 remain upbeat on its earnings growth in FY15 and still opine 1.00 90 that its 11.4x FY15E P/E is undemanding vs. big-cap peers. Jan-00 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Catalysts . In this report, we highlight six key re-rating catalysts: Information . (1) Attractive upside from its Singapore and China (which Bloomberg Ticker IOIPG MK are currently at the trough) exposure to trigger future re- Bursa Code 5249 rating; Issued Shares (m) 3,239 . (2) Strong established position as a leading township Market cap (RMm) 8,421 3-mth avg volume (‘000) nm developer in Malaysia; Price Performance . (3) IOIP has the largest development landbank in Malaysia, 1M 3M 12M injected at low land cost from IOIC; Absolute % -3.7 nm nm Relative % -4.8 nm nm . (4) More re-rating to come as it unlocks value from its property investment portfolio; Major shareholders (%) . (5) IOIP has the strongest balance sheet amongst property Tan Sri Lee Shin Cheng 46.4 developers in Malaysia; and EPF 9.4 . (6) IOIP’s Syariah status is expected to be resolved in May. Summary Earnings Table FYE 30 Jun (RM m) 2013A 2014E 2015E 2016E Risks . Has 28% exposure to China and Singapore in terms of Revenue 1,323.3 1,394.3 1,694.6 2,101.0 GDV, making it sensitive to any external slowdown and Reported net profit 693.6 559.1 739.0 1,013.2 Norm. net profit 693.6 559.1 739.0 1,013.2 forex fluctuations. Norm. EPS (sen) 21.4 17.3 22.8 31.3 EPS growth (%) 15.5 -19.4 32.2 37.1 Comment . IOIP currently trades at 11.4x FY15E P/E, which is Norm. PER (x) 15.8 15.1 11.4 8.3 FD PER (x) 15.8 15.1 11.4 8.3 undemanding vs. its fellow big-cap developers, UEM Net DPS (sen) 0.0 4.3 5.7 7.8 Sunrise and SP Setia (14.9x and 11.0x respectively). As we Dividend yield (%) 0.0 1.7 2.2 3.0 believe IOIP enjoys better growth prospects than UEM BVPS (RM) 3.2 3.3 3.5 3.7 Sunrise and SP Setia, IOIP is our top pick in the large-cap P/B (x) 0.8 0.8 0.7 0.7 HLIB space. Valuation . After tweaking our earnings, our RNAV estimate for IOIP is changed slightly from RM4.45 to RM4.28. We are keeping our 10% discount to RNAV, with a new TP of RM3.85, which implies 16.9x FY15E P/E. We believe this is a fair valuation benchmark for IOIP, given that UEM Sunrise currently trades at 14.9x FY15E P/E. Moreover, we are bullish on IOIP’s re-rating prospects, and opine that it deserves to trade at the upper end of the valuation range for Malaysian property developers. BUY Page 1 of 18 4 March 2014 HLIB Research | IOI Properties Group Bhd www.hlebroking.com Key Highlights Brief background. IOIP originated as the property arm of IOI Corporation Bhd, and A leading developer in has been an active developer in Malaysia for more than 20 years now. Back in 2009, it Malaysia was privatised and delisted as part of its efforts to pursue various landbank acquisitions. At the time, its key projects were Bandar Puchong Jaya and Bandar Puteri Puchong in Klang Valley, and Bandar Putra Kulai in Johor. The transformation since delisting. We note that IOIP was a very different company Bigger and better now four years ago, being fairly illiquid back then with a much smaller market cap as compared to now (RM1.5-2bn prior to delisting). From 2009-2013, the property division oversaw rapid expansion both locally and overseas. Today, IOIP has a net asset base of RM11.0bn (Dec 2008: RM3.3bn) and a greatly enlarged asset base. This includes 14,000 acres of development landbank in Malaysia, Singapore and China, close to 7,000 acres of plantation land in Malaysia earmarked for future development and 2.65m sft of NLA within its investment property portfolio. In comparison, we note that as of its 2008 annual report, the old IOIP had just 6,300 acres of development land in total. Proven management team. We like IOIP’s strong and proven management team. Mr Experienced management Lee Yeow Seng, the youngest son of Tan Sri Dato’ Lee Shin Cheng, has been team with a good track appointed as the CEO. He holds an LLB (Honours) from King’s College, London and record is ably supported by his experienced team of managers who have been long-serving staff in the IOI group prior to the demerger. Mr Teh Chin Guan is Property Director, and previously held various senior positions in Berjaya Land Bhd before joining IOI Corporation (IOIC) in 2009. He heads the day to day operations of the property division in Klang Valley and jointly participates with the directors on business planning. Ms Lee Yoke Har is Senior GM of Marketing and Business development, having joined in 1996. She is in charge of sales and marketing for Klang Valley projects and leasing and management of part of IOIP’s investment properties. Figure #1 IOIP board of directors Director Designation Tan Sri Dato’ Lee Shin Cheng Executive chairman Dato’ Lee Yeow Chor Executive director Mr Lee Yeow Seng Executive director Tan Sri Ong Ka Ting Senior independent non-executive director Dr Tan Kim Heung Independent non-executive director Datuk Tan Kim Leong Independent non-executive director Datuk Lee Say Tshin Independent non-executive director Source: Company Four key divisions. Following the demerger exercise from IOIC, the new IOIP is now Primarily focused on aligned along four main divisions: (1) Property development; (2) Property investment; property development and (3) Leisure & hospitality (golf courses and hotels), and (4) Plantations. The property property investment development and investment divisions are the key earnings drivers, collectively accounting for more than 90% of IOIP’s group revenue in FY13. Investment thesis Thesis overview. We are long-term positive on IOIP based on the following key long- Six key re-rating catalysts to term catalysts: (1) Attractive upside from its Singapore and China (which are now at generate alpha trough) exposure to trigger future re-rating; (2) Strong established position as a leading township developer in Malaysia; (3) IOIP has the largest landbank in Malaysia, injected at low land cost from IOIC; (4) More re-rating to come as it unlocks value from Page 2 of 18 4 March 2014 HLIB Research | IOI Properties Group Bhd www.hlebroking.com its property investment portfolio; (5) IOIP has the strongest balance sheet amongst property developers in Malaysia; and (6) IOIP’s Syariah status is expected to be resolved in May. Figure #2 Regional GDV breakdown Malaysia remains the lynchpin China 20% Singapore 8% Malaysia 72% Source: Company Catalyst #1: Future re-rating from Singapore and China divisions Waiting for the upcycle. One of the interesting points of IOIP is that its listing comes Well-positioned to ride the at a relatively low point in the Singapore and China property cycles. Currently, these eventual upcycle in two markets have minimal contribution to earnings. In Singapore, IOIP currently has Singapore and China five on-going projects, which have made only modest sales contributions thus far. As for China, the group has two upcoming projects, IOI Park Bo Bay and IOI Palm City, both in Xiamen of China. Following the cooling measures imposed in both countries, activity has slowed down, and thus we expect IOIP to be a direct beneficiary when the property cycle for these two markets make an eventual comeback. Singapore: Waiting for the recovery Singapore projects. The group entered Singapore in 2007, and embarked on high- end projects in Sentosa Cove. To-date, IOIP currently has five projects in Singapore, which have made only modest sales contributions historically, as the projects are priced at a high-end range of SGD1,000-3,500 psf. However, this has changed starting in FY13, thanks to strong sales from The Trilinq @ Jalan Lempeng, which has achieved a healthy 60% takeup within 7 months of launching of Phase 1, which comprises 200 units. Figure #3 Singapore projects Project Commenced Land size Status GDV Takeup (%) (acres) (SGD m) Cityscape @ Farrer Park 2011 2.08 Ongoing 403 84% The Trilinq @ Jalan Lempeng 2012 6.00 Ongoing 984 40% Seascape @ Sentosa Cove 2008 3.61 Completed 1068 31% Cape Royale @ Sentosa Cove 2010 5.32 Upcoming 1992 nm South Beach @ Beach Road 2011 8.64 Ongoing 944 nm Total 25.65 5391 Source: Company South Beach project.