News

• IOIPG proposed acquisition of a 37.17% stake in Taipei Financial Center Corporation (TFCC) for TW$25.14bn or RM2.74bn. TFCC owns Taipei 101 building.

• The purchase amount is paid through a combination of internally generated funds and bank borrowing. The proposed acquisition is expected to be completed by 1QCY15.

Comments

• We were caught by surprise on the proposed acquisition as we did not exp ect the group to expand its international exposure further.

• Taipei 101 mainly consists of a shopping mall and office tower with occupancy rate of 100% and 96%, respectively. Among Taipei 101’s notable tenants include Google Taiwan, Taiwan Stock Exchange Corporation, KPMG and BNP Paribas.

• Although the price tag of RM2.74bn is considered steep (circa 70% premium to effective NBV of RM1.35bn as at 31 Dec 2013), we believe the potential land appreciation of the property should not be dismissed.

• Based on our findings, Taipei 101’s value land ros e 17% from 2012, replacing Shin Kong Life Tower as the site of the country’s most valuable land. Furthermore, average rental rate for Grade A offices are currently charged at TW$80.6 ps f (as at 1QCY14) vs. Taipei 101’s rate of TW$77.0 ps f. This shows the potential hike in rental rates going forward upon the renewal of tenancy agreement. Taipei 101’s reta il s pace on the other hand is priced at TW$420 psf.

• With an almost 100% occupancy rate, the proposed acquisition would offer IOIPG a stable rental income with potential rental accretion going forward, as well as potential capital appreciation due to its strategic location.

• Financially, the price of RM2.74bn would increase IOIPG’s net gearing ratio significan tly from 0.16x to 0.40x. However, this remained below the generally rule of-thumb maximum level of 0.50x and still allow the group for further potential acquisition of up to RM1.11bn.

Risks

• 28% exposure to China and Singapore in terms of GDV, making it sensitive to any external slowdown and forex fluctuations .

Forecasts

• Maintained, pending completion of the acquisition.

Rating

HOLD

Positives

• highly liquid proxy to property sector; largewar-chest for landbank acquisitions; has exposure to Singapore and China property markets; enjoys vast and cheap landbank.

Negatives

• Could face sector headwinds in Malaysia,while the Singapore and China property markets are also currently at the low point of their cycles.

Valuation

Maintain TP at RM2.65 (10% discount to RNAV , 17.3x CY15 P/E). Our TP will be adjusted to RM2.27 post the rights issue exercise. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 8 Dec 2014