IOI Properties shares continue to fall despite higher Q1 profit

Kuala Lumpur - IOI Properties fell five sen to RM2.34 on Wednesday, despite announcing the day before a 64 per cent increase in net profit for the first quarter to end-September.

IOI Properties has lost 4 per cent since it proposed a cash call last week to fund its Marina Bay land acquisition. Analysts said the cash call exercise would result in earnings dilution and share price consolidation in the short to medium term.

For July to September, the Malaysian developer registered a profit of RM190 million (S$62 million), from RM115.5 million for the same quarter last year. Revenue was also higher at RM900 million (RM595 million before) on improved sales in Singapore and Xiamen, China, as well as progress billings for ongoing projects.

Analysts said its performance was in-line with expectations, notwithstanding lower Ebitda (earnings before interest, tax, depreciation and amortisation) margins of about 30 per cent, compared with 38 per cent previously. However, its cash call appeared out of line to investors, even though the fund raising exercise was not a surprise given balance sheet pressures stemming from its successful but pricey bid for the 1.09-hectare parcel of leasehold land at Central Boulevard put up by the Urban Redevelopment Authority.

With the S$2.57 billion tender expected to be completed in the first quarter of next year, IOI Properties will need to gear up primarily to repay borrowings stemming from the Singapore acquisition. Its renounceable rights issue of up to 1.11 billion new shares will expand its share base by a fourth to 5.53 billion and raise some RM1.52 billion.

Hong Leong Investment Bank expects its net gearing to be more manageable after the exercise, and to reduce from 0.70 times to 0.61 times, while AffinHwang pegged the reduction to a lower 0.42 times.

Analysts project earnings dilution of about a fifth for FY17 and about 17 per cent the year after.

Set at an issue price of RM1.38 a share, the rights call is at a 36 per cent discount to the five-day volume weighted average price of RM2.14. IOI Properties was last traded at RM2.34.

While its rights call was not entirely a surprise, the frequency of such issues was - particularly because of the weak economy and underperforming stock market.

Kenanga Research observed the group has had cash calls every year since 2014 to fund landbanking plans. It undertook a rights issue to raise RM1 billion in 2014 and made a RM1.4 billion placement last year. Including the current cash call, its total fund-raising amounts to RM3.9 billion. Kenanga said the "rampant cash calls" were a concern as the developer's expansion plans may be too ambitious because returns on its investments may take longer to bear fruit. "Although the group has seen decent FY14-16 CAGR (compounded annual growth rate) for core earnings of 19 per cent, ROE (return on equity) remains flat at 4.3 per cent."

Hong Leong said it was negative on the cash call in the short term but long term positive on the Marina Bay land purchase, given its prime land status for office development. Also, it observed the acquisition to be in line with the company's target to double its investment income to 40 per cent from 20 per cent at present.

This article was first published on November 24, 2016.
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