PETALING JAYA: IOI Properties Group Bhd (IOIProp), which is majority owned by the Lee family, has been steadily building its presence in the Singapore property market.
Its recent project there, the IOI Central Boulevard (IOICB) has seen its occupancy rates increase to 50% from 40% previously, according to UOB Kay Hian (UOBKH) Research.
Additionally, the research firm understands that a smaller tenant has signed a lease at a record-high rental rate of S$14 per sq ft (psf), reflecting the positive office market in Singapore.
For context, it said that the group’s management is maintaining an average rental rate guidance of S$13 psf.
“Assuming IOICB begins contributing in October 2024, with an average occupancy of 70% in its first year, we forecast gross rental income of S$95mil or about RM314mil for financial year 2025 (FY25),” the research firm said in a report highlighting some takeaways from IOIProp chief executive officer Lee Yeow Seng’s recent interview with Forbes.
UOBKH Research forecasts substantial rental income contribution in FY26, reaching S$163mil or about RM539mil, with occupancy at 90% and the rental rate unchanged at S$12 psf.
The research firm said it has conservatively estimated a lower rental rate than the management’s guidance, which could lead to potential upside in its forecast.
The group’s other property investment assets are also showing improvement in occupancy.
IOI Business Park in Xiamen, China, is set to contribute to earnings from the first quarter of FY25 onwards. Back home the IOI City Tower 1 in Putrajaya has secured the Royal Bank of Canada as an anchor tenant, boosting occupancy from 0% to 40% with a RM5 psf rental rate, generating an estimated RM14mil in additional income.
“Meanwhile, we understand that its Puchong Financial Corporate Centre is at an advanced stage of negotiation to lease the rest of the unoccupied space (40%) for the Malaysia Semiconductor Accelerator & IC Design Park which we estimate at around RM20mil in incremental rental income per year.
“All in, we expect IOIProp’s property investment and hospitality and leisure segment to grow 48% in FY25 and 26% in FY26 thanks to the improving outlook of its assets.”
On the group’s plans to reduce its debt, UOBKH Research said its gearing is expected to drop substantially to at least 40% to 50% after the real estate investment trusts (REITs) exercise.
According to the UOBKH Research, it plans to divest some office and hotel assets into a REIT to be listed on the Singapore Exchange within two to three years.
“Our pro forma calculations estimate that the dividend discount model and gordon growth model valuation for IOICB is approximately S$3bil to S$4bil, closely aligning with its asset value of S$6bil and estimated debt level of S$2bil to S$3bil.
“Therefore, we believe fair market value upon listing would be around S$3bil to S$4bil,” it added.
Assuming IOIProp holds 55% of the REIT, the cash proceeds from this initial public offering (IPO) would be approximately S$1.65bil to S$2.2bil, resulting in immediate decline in gearing to 50% from 70% currently, said the research firm.
On the other hand, if IOIProp were to consolidate all investment property assets and hospitality and leisure assets into one REIT and assume a listing on Bursa Malaysia, UOBKH Research derived a fair value of RM14bil to RM16bil.
For context, at the time of writing, IOIProp’s current market capitalisation stood at RM12bil.
Assuming it maintains a 55% holding of the REIT, expected cash proceeds would be around RM7bil, reducing gearing to 40%. Its net gearing could potentially decrease to as low as the 30% to 35% level if the cash from its mature property investment assets over the next two to three years is factored in.
Despite the recent increase in share price, UOBKH Research said the stock is trading at an undemanding valuation against its peers with FY24 price-earnings (PE) of 16 times and price-to-book (PB) of 0.5 times – below the industry average of 20 times PE and 0.7 times PB respectively. “Hypothetically, if we were to include the REIT IPO valuation of RM14bil to RM16bil, our target price will increase to RM3.20 to RM3.30.”
Currently, it has a RM3.06 target price on IOIProp with a “buy” call.