Highest Yield Among Large-Cap Developers, BUY Rating on IOI Prop: RHB IB

(Photo credit: IOI Properties)

RHB Research has expressed its optimism on IOI Properties’ improved earnings quality, in view of its stronger recurring income stream. Its two new sizeable commercial assets should lift the EBIT contribution of the property investment division to around 35% in 1-2 years (vs c.20% currently), providing potential upside to dividend payouts.

On top of that, the gradual easing of China’s zero-COVID policy will also be favourable to IOIPG’s new launch in Xiamen.

The research house has, thus, maintained a BUY rating on this counter with new target price (TP) of MYR1.40 (from the previous TP of MYR1.18). This translates to 31% upside with c.5% yield. Its target price (TP) is based on a 65% discount to RNAV (from 70%), with a 6% ESG discount applied.

No change to FY23 sales target of MYR1.9 billion. RHB Research just hosted a virtual meeting with IOIPG’s CEO Dato’ Voon Tin Yow, CFO Melissa Tan and Corporate Finance General Manager Chee Ban Tuck, recently. The company’s MYR1.9 billion sales target for FY23 is flat year-on-year (YoY). While FY22 saw higher inventory sales, about MYR1.4 billion worth of new projects will be rolled out in FY23. These include townhouses and terrace homes at 16 Sierra (GDV: MYR262 million), semi-detached units in existing townships in Bangi and Johor, as well as condominium and retail shops at Xiang An, Xiamen (GDV: MYR436 million). Given the gradual easing of zero-COVID measures in China, the research house is upbeat on its launch of the Xiang An project next year.

Two assets to boost rental income. The research house reiterates that earnings for IOIPG’s property investment division should strengthen quite significantly over the next 1-2 years. IOI City Mall Phase 2 (1.04 million sqf NLA) began operating in Aug 2022. While the mall’s second phase already has a committed occupancy rate of 85%, only about 50% of tenants have started operating. Based on the estimation of the research house, Phase 2 will likely contribute MYR85-90 million in rental income on a full-year basis after the first year.

Meanwhile, management has indicated that an anchor tenant has already committed to take up 29% of the NLA in Central Boulevard Towers in Singapore (1.28 million sqf of NLA), which will be completed in end-2023. This Green Mark Platinum-grade office building is estimated to generate MYR350-400 million in rental income per annum.

Strong recurring income stream may enable higher dividend payout. Besides the conservative 16% payout over the last two years (FY20-21), possibly due to the impact of pandemic, IOIPG’s historical payout ratio ranges 25-37%. In FY22, the company paid 4 sen dividend per share (DPS) which represented a payout of 32%. Given the robust earnings from property investment segment in the coming years, there is the possibility of higher payout ratio going forward. Note that, its FY23-25F dividend yield of 5-6% is already the highest among all the large-cap developers.

Not shariah-compliant for the medium term. As some new SGD-denominated borrowings were undertaken recently to fund projects and land acquisitions in Singapore, it is highlighted that IOIPG will likely remain non-shariah compliant over the next 1-2 years, at least.

Key risk identified is weaker-than-expected market conditions.

Salient Points on IOI Properties:

Target Price (Return): MYR1.40 (+31% upside potential)
Price (Market Cap): MYR1.07 (USD1,338m)
ESG score: 2.70 (out of 4)
Avg Daily Turnover (MYR/USD) 0.85m/0.19m

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