News  IOIPG entered into a conditional Share Sale Agreement (SSA) to acquire 546.46m shares of NT$10 each or 37.17% interest in Taipei’s Financial Center Corporation (TFCC), which owns the Taipei 101 building, for NT$25.14b (RM2.74b). The stake is owned by several parties; Ting Gu Development Co Ltd, Ting An Ltd, Ting Ji Development Co Ltd and Ting Li Development Enterprises. (Refer overleaf for details).

Comments  We were taken by surprise by the acquisition. As they have just proposed a rights issue of RM1.03b, we had expected them to land bank and/or fund CAPEX of their own investment properties. While the company has expressed long-term ambitions to grow its recurring income base, Taiwan was the last destination on our mind. To recap, the group has allocated only RM200.0m of the rights issue for ‘investment opportunities’ while the others are earmarked for its ongoing investment properties (e.g. IOI City components) and working capital requirements.

 Valuation-wise, we think the asset price is fair. The acquisition price is well above the building’s NBV of RM1.60b as at 31 Dec 2013. Based on our estimated price tag of RM2.74b, this implies a cap rate of 4.5%-4.8% which is extremely low when compared to Malaysian standards but is considered quite decent vis-à-vis Taipei’s current levels of <3% for retail and offices of Grade A quality. Property consultants also opine that Taipei’s commercial segment may have ‘peaked’ considering that their yields are one of the lowest in Asia. FY15E net gearing is expected to increase to 0.38x post acquisition and rights issuance, from our current end-FY15E net gearing of 0.24x, which is still at comfortable levels.

 Overall, we are neutral to slightly negative. While we think the price tag is fair, the asset accretion does not fully compensate the dilution effect seen in core PER and ROE arising from the rights issuance (refer overleaf). In the near to medium term, we think upsides are limited for Taipei 101’s income streams and valuations.

Outlook  Both the acquisition of Taipei 101 and the 1-for-6 rights issue is expected to be completed in 1QCY15.

Forecast  Raising FY15-16E core earnings by 3%-8% (refer overleaf).

Rating UNDER REVIEW

Valuation  As we think that the asset valuation is fair, there is no surplus to the asset price and thus, no changes to our FD RNAV of RM5.31. Our CALL and TP on IOIPG is UNDER REVIEW with a potential downside bias, pending our upcoming sector strategy. We are increasingly concerned over the tighter lending environment and post-GST impact on property prices and buyers’ sentiment. Our previous recommendation on IOIPG was OUTPERFORM with a TP of RM3.10 based on 42% discount (in-line with sector average) to its ex-rights FD RNAV of RM5.31.

Risks  Failure to meet sales targets. Sector risks, including overly negative policies.

Source: Kenanga