We downgrade to NEUTRAL with a lower TP of MYR2.63 (implying 10% upside), as we turn bearish on Malaysia’s property sector going into 2015.  We  are  also  neutral  on  its  37%  stake  acquisition  in  Taipei  101. While this could lift IOIPG’s earnings slightly and give it the prestige of owning  a  meaningful  stake  in  a  landmark  premium  building,  we  think the market will need more time to digest the transaction, given its size.  

To acquire 37.17% stake in Taipei 101. IOI Properties Group’s (IOIPG) proposed acquisition of a 37.17% stake in Taipei 101 costs TWD25.14bn (MYR2.74bn or MYR3,124 psf). The building comprises office space and retail  components  with  1.95m  and  0.41m  sqf  of  NLA, respectively.  The shopping  mall  is  fully  tenanted,  while  the  occupancy  rate  for  office  is about  96%.  The  properties  are  occupied  with  quality  tenants,  such  as Taiwan  Stock  Exchange,  multinational  financial  institutions  and  major accounting firms. Tenancy risk is low, as the lease has a tenure of 70 + 20  years.  The  acquisition is  targeted  to  be  completed  by  1Q15,  and  is not subject to the approval of IOIPG’s shareholders.

>5%  gross  yield  above market  average.  Given  the  average  rental  of TWD420  psf  and  TWD77  psf  for  the  retail  and  office  space,  this translates into a gross yield of >5%. This seems attractive compared with a market average yield of around 2.5-3.0% for commercial properties in Taipei, based on our findings. According to the media, the vendor, Ting Hsin International Group, is in financial difficulties due to its involvement in sub-standard oil issues, and hence it is forced to sell assets.

Funding. We believe part of the proceeds of MYR1.03bn from the recent rights issue exercise (1-for-6 @ MYR1.90 per rights) will be used to fund this purchase. According to the announcement, assuming the acquisition is fully funded by borrowings, IOIPG’s net gearing will increase to 40%.  

Forecasts. We raise our FY16-17 earnings forecasts by 6% and 2% to reflect the impact of the proposed acquisition.

Downgrade to NEUTRAL (from Buy). Given the size of this acquisition (1/3  of market  cap)  coupled  with  the  expected  dilution  impact  from the rights issue, we believe the market will likely take extra time to digest this bold  move.  Meanwhile,  we  are  turning  bearish  on  the  property  sector next year as negative sentiment kicks in after the recent fall in equity and commodity prices, and hence the potential downside in GDP growth. We lower our TP to MYR2.63 (from MYR3.10), based on a larger discount to RNAV of 40% (from 30%).

We downgrade to NEUTRAL with a lower TP of MYR2.63 (implying 10% upside), as we turn bearish on Malaysia’s property sector going into 2015.  We  are  also  neutral  on  its  37%  stake  acquisition  in  Taipei  101. While this could lift IOIPG’s earnings slightly and give it the prestige of owning  a  meaningful  stake  in  a  landmark  premium  building,  we  think the market will need more time to digest the transaction, given its size.  

To acquire 37.17% stake in Taipei 101. IOI Properties Group’s (IOIPG) proposed acquisition of a 37.17% stake in Taipei 101 costs TWD25.14bn (MYR2.74bn or MYR3,124 psf). The building comprises office space and retail  components  with  1.95m  and  0.41m  sqf  of  NLA, respectively.  The shopping  mall  is  fully  tenanted,  while  the  occupancy  rate  for  office  is about  96%.  The  properties  are  occupied  with  quality  tenants,  such  as Taiwan  Stock  Exchange,  multinational  financial  institutions  and  major accounting firms. Tenancy risk is low, as the lease has a tenure of 70 + 20  years.  The  acquisition is  targeted  to  be  completed  by  1Q15,  and  is not subject to the approval of IOIPG’s shareholders.

>5%  gross  yield  above market  average.  Given  the  average  rental  of TWD420  psf  and  TWD77  psf  for  the  retail  and  office  space,  this translates into a gross yield of >5%. This seems attractive compared with a market average yield of around 2.5-3.0% for commercial properties in Taipei, based on our findings. According to the media, the vendor, Ting Hsin International Group, is in financial difficulties due to its involvement in sub-standard oil issues, and hence it is forced to sell assets.

Funding. We believe part of the proceeds of MYR1.03bn from the recent rights issue exercise (1-for-6 @ MYR1.90 per rights) will be used to fund this purchase. According to the announcement, assuming the acquisition is fully funded by borrowings, IOIPG’s net gearing will increase to 40%.  

Forecasts. We raise our FY16-17 earnings forecasts by 6% and 2% to reflect the impact of the proposed acquisition.

Downgrade to NEUTRAL (from Buy). Given the size of this acquisition (1/3  of market  cap)  coupled  with  the  expected  dilution  impact  from the rights issue, we believe the market will likely take extra time to digest this bold  move.  Meanwhile,  we  are  turning  bearish  on  the  property  sector next year as negative sentiment kicks in after the recent fall in equity and commodity prices, and hence the potential downside in GDP growth. We lower our TP to MYR2.63 (from MYR3.10), based on a larger discount to RNAV of 40% (from 30%)

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

A  property  arm  of  IOI  Corp,  IOI  Properties  Group  (IOIPG)  is  a  specialised  township  developer  in  Malaysia,  with  anchor  projects  in Puchong, the Klang Valley and Kulai, Johor. Its overseas exposure includes Xiamen, China and Singapore

Recommendation Chart

Source: RHB