PETALING JAYA: IOI Properties Group Bhd
(IOIProp) is poised for an improvement in its earnings outlook beyond the financial year 2025 (FY25), driven by an expanding investment property portfolio and stable contributions from its property development segment.
CGS International Research (CGSI Research), which initiated coverage on the stock, said the bright prospects of the property group has been underappreciated due to concerns over its elevated gearing.
“We view IOIProp as an undervalued structural growth story, underpinned by a 15.6% compounded annual growth rate in FY27 core earnings per share, driven by the expansion of its investment property portfolio and incremental earnings contribution from W Residences,” it noted.
In addition, there are potential improvements in IOIProp’s gearing from the monetisation of its investment properties via real estate investment trust (REIT) listings as well as improving earnings quality with resilient recurring income.
Hence, the research house has pegged an “add” rating on the stock with a target price of RM3.25 per share.
The research house also believes that IOIProp stands to benefit from accelerated growth in property demand in Johor, driven by the Johor-Singapore Special Economic Zone or JS-SEZ, thanks to its landbank of over 3,000 acres in the state.
Following the recent addition of new investment properties and the commencement of IOI Central Boulevard Towers or ICBT in Singapore in July 2024, IOIProp’s earnings quality has improved markedly, with increased contributions from its recurring income assets.
“We also expect the ongoing acquisition of the remaining 50.1% stake in South Beach development for S$834.2mil (about RM2.75bil) to be earnings-accretive despite the potential rise in near-term gearing,” it added.
CGSI Research has estimated IOIProp’s earnings before income tax (Ebit) contributions from its property investment segment will rise meaningfully to 47% of the group Ebit by FY27 (from 24% in FY18), the highest among its Malaysia property coverage universe.
“This makes IOIProp less susceptible to fluctuations in property development earnings and narrows the deep discount to return on net asset value, in our view,” the research house noted.
CGSI Research also said IOIProp has been reported to be exploring two REIT listings – one for its Malaysian assets worth RM7bil-RM8bil and another for Singapore-based assets worth S$7bil-S$8bil.
“Based on our assumptions of IOIProp retaining 50% controlling stakes in both REITs post their listings in FY27 to FY28, and a combined listing valuation of RM32.3bil, we project the group’s net gearing to fall to about 0.36 times by end-FY28.
“This is a meaningful improvement from 0.97 times in a scenario without the monetisation.”
CGSI Research also viewed the potential REIT listings as dual-impact, thereby unlocking value in the group’s investment property portfolio, and serving as structural drivers in IOIProp’s valuation.