Analysts mixed on Central Boulevard’s outsized impact on group

IOI Property Group has three core business segments: Property development, property investment, and hospitality & leisure. In an email response, the group says: “These segments have provided sustained income for its expansion plans and expediting growth especially for its malls, offices, notably IOI Central Boulevard Towers in Singapore and Hospitality sub-segments as well as its Industrial Parks in Banting, Melaka and Iskandar Malaysia.”

Notably, the outsized impact of IOI Central Boulevard Towers on the group was clear in its 1QFY2025 ended Sept 30, 2024, results. In a report dated Dec 3, 2024, Hong Leong Investment Bank says the interest payments for IOI Central Boulevard Towers have always been a part of the group’s financials; they were simply capitalised previously, keeping them “out of sight and out of mind”.

The report says that the commencement of operations at IOI Central Boulevard Towers should be viewed positively, as it represents cash flow for the property group. “IOI Central Boulevard Towers is the single-largest asset coming live for IOI Properties Group [IOIPG]. Its asset value of RM14.4 billion as at the end of June 2024 makes up a staggering 67% of the group property investment portfolio size of RM21.5 billion [$6.54 billion]. Its scale naturally translates to a significant impact on the group’s earnings — both positive and negative. While its debut has weighed on this quarter’s results, its eventual profitability will contribute substantially to IOIPG’s financial performance, underscoring its importance as a key driver of future growth,” the Hong Leong Investment Bank report says.

Says MIDF Research: “Despite higher topline (+6.1% y-o-y), earnings were weighed downby higher interest cost, which surged to RM109 million in 1QFY2025 from RM356,000 in1QFY2024 as interest expense for Central Boulevard is no longer capitalised from FY2025onwards following completion of the building in July 2024.”

Hong Leong Investment Bank says South Beach Tower’s occupancy is on the rise. “In1QFY2025, JV earnings for the segment were at breakeven, weighed down by SouthBeach Tower’s lower occupancy rate of 70% (following the departure of anchor tenantMeta early in the year) and agent fees incurred to secure replacement tenants. As of end-September 2024, the group reported that the committed occupancy rate had improvedsignificantly to nearly 90%,” the Hong Leong report says.

According to Cushman & Wakefield, much of the remaining available space is eitherleased or in advanced negotiations, suggesting that occupancy could approach fullcapacity in the near future. An increase in occupancy rate from 70% to 100% representsan estimated additional annual revenue of approximately RM33.1 million for IOIPG’seffective stake, assuming a rental rate of $11 psf and an exchange rate of RM3.3 per SGD,the Hong Long Investment Bank report estimates.

Meanwhile, in Kuala Lumpur, where IOI Properties’ headquarters is based, the group is inthe process of acquiring Tropicana Gardens Mall for RM680 million. The transaction isexpected to be completed by early February.

The mall, with a net lettable area of 1.05 million sq ft and a 77% occupancy rate as ofAug 31, 2024, will be rebranded as IOI Mall Damansara.

In a recent update, Hong Leong Investment Bank says it maintains its conviction buyrating with a target price of RM4.05 based on a 35% discount to its estimated RNAV ofRM6.24.

“During periods of share price weakness, market concerns often dominate the narrative— whether it is Marina View’s pricing being perceived as too high, net gearing levelssparking caution, or the Shenton House injection raising overhang concerns. Withsequential earnings improvements expected, we believe the share price is poised for arebound,” Hong Leong Investment Bank says.

MIDF Research is a lot less positive and maintains a neutral call. “Despite the improvingsales outlook, which will be driven by the launch of Marina View Residences in Singapore,the net gearing of IOI Properties Group is expected to increase going forward from netgearing of 0.69 times in 1QFY2025 due to development cost for Marina View Residences.”MIDF Research has a target of RM2.04 based on a 60% discount to IOI PropertiesGroup’s RNAV.

Elsewhere, Kenanga Research has cut its FY2025 and FY2026 earnings by 11% and 6%,respectively, to account for a softer property development arm, as operating margins will likely stay sluggish.

Kenanga’s target is pegged at a 65% discount to RNAV, which works out to RM1.67.Kenanga has an underperform rating for IOI Properties Group because it believesvaluations are rich. “Amidst near-term headwinds, we believe its risk-reward isunfavourably skewed at the moment.”