By Xavier Kong
IOI Properties Group Bhd recently acquired additional land bank from group founder Lee Shin Cheng. Is this the booster shot that IOIPG has been waiting for?
Business model: IOI Properties Group Bhd (IOIPG) used to be the property arm of IOI Corp Bhd, and was relisted on the Main Market of Bursa Malaysia on Jan 15, 2014. IOIPG lists property development, property investment, as well as leisure and hospitality as its core competencies.
The group has ownership of land in the Klang Valley, Penang, and Johor, as well as in Singapore and China, with the group entering the two countries in 2007 and 2010 respectively.
Recently, IOIPG had announced on Bursa Malaysia that they will be acquiring a total of 399 acres of land in the vicinity of IOI City Resort, in the form of the acquisition of two companies, namely Mayang Development Sdn Bhd and Nusa Properties Sdn Bhd from its founder Lee Shin Cheng, making this a related party transaction.
The total consideration of the deal is for RM1.93 billion, with the purchase consideration to be paid by 30% cash and 70% in new share issue at RM2.21 per share.
Shareholders and management: The largest stake in IOIPG, currently 49.92%, is owned by Progressive Holdings Sdn Bhd, which is a holding company under the control of founder Lee and his family. The second-largest shareholder is the Employees Provident Fund with 8.75% and Permodalan Nasional Bhd with 6.09%.
In terms of management, the founder himself is the executive chairman of the board, with his son Lee Yeow Seng as chief executive officer of IOIPG. Also on the board is Lee Yeow Seng’s brother, Lee Yeow Chor, who is also the chief executive officer of IOI Corp.
It should be noted that all six of Lee’s children work in either IOIPG or IOI Corp, making it a family business. Another name of interest is Ong Ka Ting, former president of the MCA, who had been on the board since June 1, 2013, but has since announced his retirement in an Oct 26 filing on Bursa.
Share performance: IOIPG saw an intra-year high of RM2.78 on Nov 6, 2014, but has been trending downward since, hitting an intra-year low of RM1.80 on July 9, 2015. However, the stock has seen some recovery since then, ending the Oct 30, 2015 trading day at RM2.02.
However, this in itself followed a slump from RM2.29, which the group saw on Oct 23, 2015, likely a response to the announcement of the land injection by the group’s founder.
What analysts think: Analysts range from neutral to slightly positive on the news of the land injection by Lee. Management had guided a gross development value (GDV) of RM20 billion for the 399 acres, which will be developed as a mixed development project.
“This increases our estimated group’s remaining total GDV by 20% to RM119 billion,” said Kenanga IB, which noted that this injection came as a surprise, as the research house had not anticipated any major land-banking activity from the group.
Still, Kenanga IB noted that it is slightly positive on the deal, calling it a plus in the longer term, due to IOI City Mall having done “extremely well” with a 92% occupancy rate less than a year into operations, as well as the slew of new developments the general area has seen recently.
However, the bank-backed research house was less excited about the 17% dilution impact to the group’s earnings per share, calling the dilution significant in the near term, as development contributions will only be meaningful in one and a half to two years.
Affin Hwang Capital, who is neutral on the deal, noted that, while the deal would immediately dilute earnings, there is comfort in that the consideration would be largely in shares. At the same time, the research house believes that the injection, at RM110.75 per square foot (psf), was a premium, “at least when compared to Mah Sing’s 408-acre land acquisition in Bangi for only RM330.5 million in 2012, at RM18.60 psf”.
However, Hong Leong IB noted that the acquisition price was still cheaper compared to the prices noted by a third-party valuer at RM144 psf, as well as the average transaction price of between RM120 and RM150 psf in Putrajaya and Cyberjaya.
“Land cost is about 10% of total GDV, which we deemed the acquisition price as fair,” said HLIB, who remains neutral on the deal, as the research house believes the fair pricing offsets the earnings per share dilution.
“We believe this is a synergy acquisition as this will expand IOIPG’s land bank in IOI Resort City from the existing 50 acres to 450 acres, and complement the existing development. In addition, this also provides an opportunity for IOIPG to embark on the development of the second phase of IOI City Mall, which has already achieved a 92% occupancy rate,” said HLIB.
Still, Affin Hwang Capital believes that the indicated RM20 billion GDV “is rather aggressive in comparison to Mah Sing’s Southville City project in Bangi, which has a GDV of RM8.1 billion”.
Earnings forecast:
StockStalk: The land injection could very well be a strategic move by founder Lee to take advantage of IOI City Mall’s high occupancy rate. While this may, on the surface, seem to be a very good move, this actually seems to be more audacious and aggressive, as an injection of 400 acres to an existing 50 acres is not a small amount of reinforcement.
As it stands, investors could well get in on the expected bright prospects of IOIPG now due to the current value of the group’s shares hovering near its intra-year low of RM1.80.
However, investors are reminded that earnings per share has been diluted, and that there is also the matter of Lee looking to acquire more shares in his own company. With the contribution from the 400 acres only visible at least one and a half years from now, investors should take note that this is not a fast-earning stock.
There is also the risk of property sector headwinds, which the sector has been facing over the past year. The implementation of the goods and services tax, along with the weakened ringgit in recent months, has seen to continued headwinds for the sector, which further supports the belief that the indicated GDV of the 400 acres at RM20 billion is aggressive.
Still, IOIPG still has a rather large war chest, which could either fund further land acquisitions or support the group, and even with the acquisition, the group’s net gearing is only expected to rise to 0.1 times from a prior 0.07 times, indicating the low-debt situation of the group.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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