IOI Properties' high gearing a concern, analysts flag after latest acquisition plan
KUALA LUMPUR (June 5): Gaining full control of Singapore’s South Beach project may boost IOI Properties Group Bhd’s (KL:IOIPG) profitability, but analysts flagged the acquisition could also strain the developer’s balance sheet.
TA Securities and Hong Leong Investment Bank (HLIB) both raised concerns over IOI Properties’s short-term net gearing as the company’s debt-to-equity ratio could rise to as high as 0.93x from 0.7x, if the deal is fully-funded with borrowings.
IOI Properties’ elevated gearing “remains a key concern among investors,” HLIB said, noting that over 80% of its borrowings are denominated in Singapore dollars and floating-rate-linked that are sensitive to the recent drop in the Singapore Overnight Rate Average.
“Despite the positive outlook for Singapore’s office, retail and hospitality markets, the significant increase in gearing raises concerns over short-term financial risk,” TA Securities cautioned.
Analysts previously raised their concern following IOI Properties’ shopping spree involving over RM1 billion last year, as it bought Tropicana Gardens Mall, Courtyard by Mariott Penang and W Kuala Lumpur Hotel from Tropicana Corporation Bhd (KL:TROP).
On Wednesday, IOI Properties announced that it was acquiring the remaining 50.1% stake in Singapore’s South Beach development for RM2.75 billion, giving it full ownership of the high-profile mixed-use asset.
Shares of IOI Properties are still down more than 14% year-to-date, despite a rebound from the global market turmoil in April. Out of eight analysts tracking the stock, five maintain a “buy” call, including HLIB and TA Securities, while two rate it a “hold” and one a “sell”.
The consensus 12-month target price stood at RM2.47, according to Bloomberg data, implying a potential upside of nearly 30% from the last traded price of RM1.90.
Both TA Securities and HLIB, however, are betting on longer-term benefits to IOI Properties from the South Beach project, including a boost to its recurring income base, improved control over premium assets and enhanced positioning in Singapore’s property market.
Further, a potential listing of real estate investment trust for its assets could bring several strategic benefits, including unlocking asset value, reducing borrowings and strengthening the group’s balance sheet position, TA Securities said.
HLIB also pointed to the upcoming launch of W Residences at Marina View as a potential source of substantial cash flow, which could further support capital management efforts.