South Beach acquisition to boost IOI’s reputation

NEWS that IOI Corp Bhd was acquiring a 49.9% stake in Singapore's South Beach project didn't come as a surprise to the market, particularly since the group had previously mentioned its intentions to further expand into Singapore's property market.

This acquisition will add to IOI Corp's property portfolio in Singapore which now includes its joint venture with Singapore's Ho Bee Group for two condominium developments in Sentosa Cove and the development of a condo project in Balestier Road.

Most analysts are generally neutral on this move, more so from the earnings perspective. They, however, see synergies for IOI Corp to further entrench its reputation as a sound property developer in Singapore.

Analysts see IOI Corp gaining valuable experience through its joint venture with its other 51.1% shareholder, City Developments Ltd, which is a reputable property developer in Singapore.

The deal

Over the week, IOI Corp announced that it has acquired a 49.9% interest in the South Beach project in Singapore through a restructuring exercise. The 51.1% shareholder of South Beach is City Developments.

IOI Corp had bought a 33.3% stake in the project from Elad Group Singapore Pte Ltd for S$173.8mil (RM417mil).

Subsequently, IOI Corp had injected the 33.3% stake into Scottsdale Properties Pte Ltd. Scottsdale Properties now wholly owns South Beach.

IOI Corp then paid S$115mil (RM276mil) for a 49.9% stake in Scottsdale and will advance S$28mil in the form of a shareholder's loan.

IOI Corp paid around S$316.3mil (RM759.1mil) for the stake (including Elad Group's 33.33% stake in South Beach Consortium) and expects to contribute further equity of around S$500mil in Scottsdale.

“IOI and City Developments may be required to further contribute equity of S$500mil each to redeem existing mezzanine notes of the project, working capital and part-finance the construction of South Beach,” says AmResearch analyst Gan Huey Ling.

The group indicated that in total, it will invest up to S$816.8mil (RM1.96bil) in the project. In total, analysts estimate that IOI paid S$317mil (RM761mil) for a 49.9% stake in the South Beach project.

The group's net gearing stood at 11.2% as at end Dec 2010. Net debt was RM1.28bil while its cash position was RM3.6bil.

While AmResearch's Gan is neutral over IOI's investment in South Beach, she says that risk of the project is mitigated by the group's partner, which has an established track record in the property development sector in Singapore.

“The good location of the project should encourage demand. South Beach is located between Raffles Hotel and Suntec City and next to the mass rapid transit station,” says Gan.

She points out that based on an operating margin of 20% and assuming that the project's total earnings is recognised over six years, the project could increase IOI's bottomline by 3%-5%. Gan continues to like IOI for its low-cost plantation operations.

Iconic development

“We also believe that there is potential for the group to restructure. A listing of the manufacturing or property division would transform the group into a pure plantation company,” she adds.

CIMB Research analyst Ivy Ng says that the acquisition represents an opportunity for IOI Corp to be involved in an iconic development in downtown Singapore with sizeable office, hotel, residential and retail components.

“The substantial size and location of the development, which is in close proximity to landmarks such as the Suntec City Convention Centre and Raffles Hotel, will make this development one of the most popular and prominent mixed-use developments in downtown Singapore,” says Ng.

Ng says IOI Corp will gain in stature as a player in the Singapore property market and could see earnings enhancement given the relatively attractive acquisition cost. This is however partially offset by concerns over the group's increasing exposure to the property sector, which may dilute the price earnings rating accorded to the group.

Despite the strategic location and the fact that South Beach is likely the last major iconic site in the Civic District, Hong Leong Research remains neutral on the latest development, given the huge investment cost involved.

“The Singaporean government's measure to cool its property sector may in turn affect demand and hence the pricing of this development,” it added.

Subdued view

Other analysts are somewhat concerned over the subdued view of the Singapore property market and the group's mixed track record in Singapore property investment.

Meanwhile, the S$173.8mil price tag for the 33.33% stake in South Beach Consortium is attractive as it represents a 23.5% discount to South Beach Consortium's net asset value of S$681.8mil as at 31 Dec 2010.

“Although the price is 12% higher than what CityDev paid for a similar 33.3% stake bought from another party, we believe that the acquisition price is fair,” says Ng.

According to management, its effective land cost for this project is quite close to the initial bid price of S$1,069psf for potential gross floor area in 2007 due to the accumulated interests on the loan.

Hong Leong Research also believes that IOI would not have issue funding the acquisition, given its healthy balance sheet.

The South Beach project is a mixed use development on Singapore's Beach Road. The land is strategically located between Raffles Hotel and Suntec City and is next to the Esplanade MRT station. The total land area is 376,295 sq ft and has a leasehold tenure of 99 years.

Based on reports, the South Beach development will have 171 apartments, 560 hotel rooms, 632,164 sq ft of office space and 158,014 sq ft of retail space.

In Singapore, City Development has an impressive track record, having built more than 22,000 luxurious and quality homes. As one of the biggest landlords in Singapore, it owns over 6mil sq ft of lettable office, industrial, retail and residential space.

It also boasts one of the largest landbanks among property developers, with over 3.5mil sq ft that has the potential of being developed into over 7mil sq. ft of gross floor area.

source:thestar