Higher gearing seen for IOI Properties

IOI Properties Group Bhd (March 23, RM1.68)

Maintain hold with a target price (TP) of RM1.78: IOI Properties Group Bhd has terminated the proposed joint venture (JV) between its wholly-owned unit Wealthy Link Pte Ltd and Hongkong Land International Holdings Ltd to jointly own, develop and manage the Central Boulevard land in Singapore. We gather that both parties were unable to agree on construction planning within the nine-month time frame when it was first proposed on March 12, 2017.

Given that the JV has been terminated, future earnings from the investment property will not be shared. As we assume interest expenses will be capitalised, there is no immediate impact on our earnings forecasts. We have not assumed any earnings contribution and revalued net asset valuation (RNAV) enhancement from the Central Boulevard project in our model due to the execution risk and long gestation period of the project. However, IOI Properties will likely see a higher asset value for the Central Boulevard on completion in seven years’ time.

However, the downside is that IOI Properties will have to continue to consolidate and finance the project itself after the JV deal fell through. According to management, the Central Boulevard’s construction cost is S$700 million (RM2.08 billion) to S$800 million. Hence, we expect the group’s net gearing to increase to 0.57 times (second quarter of financial year 2018: 0.55 times) given the need to finance the construction costs.

We maintain our “hold” rating with a lower 12-month TP of RM1.78 (from RM2.26) as we widen our RNAV discount to 50% (from 40%) to reflect the higher development risk for the Central Boulevard project. We adjust the net debt in our RNAV estimate to reflect the latest audited figure (as at June 30, 2017). Key upside/downside risks would be stronger/weaker property sales and a recovery/prolonged downturn in the domestic property market. — Affin Hwang Capital, March 23

This article first appeared in The Edge Financial Daily, on March 26, 2018.

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