IOI Properties Group Bhd
(March 9, RM2.07)
Maintain market perform with target price (TP) of RM2.12: Last Friday, IOI Properties Group Bhd (IOIPG) made an announcement that they were terminating the conditional Share Sale Agreement (SSA) to acquire 546.46 million shares or 37.17% interest in Taipei’s Financial Center Corporation (TFCC), as they did not obtain the green light from the Foreign Investment Commission of Taiwan.

We are relieved with IOIPG terminating the SSA in line with our neutral to negative view on the deal as per our earlier report dated Dec 8, 2014. While we think the price tag of RM2.75billion for the 37.17% stake in TFCC is fair, potential asset accretion does not fully compensate for the dilution effect seen in core price earnings ratio and return on equity arising from the rights issuance as highlighted in our previous report. That said, we also believe that upsides are limited for Taipei 101 (in terms of income and valuation) in the medium term.

Despite the termination of the SSA, IOIPG is still able to claim back the deposit paid for the deal as the termination was due to the unfulfillment of a condition precedent, which further reinforced our positive view on the termination of the SSA.

The group has recently launched its maiden Bandar Puteri Bangi (gross development value [GDV]: RM4 billion) on Jan 15, comprising apartments, shop offices and two-storey terraces with total GDV of RM600 million, and thus, we could be seeing strong sales numbers in its third quarter ending March 31, 2015 (3QFY15). We gather that the project has achieved 70% take-up/bookings rates. Other than this, sales for this year will be driven by ongoing projects. Xiamen 2 project (apartments) in China will likely kick off in FY16 rather than FY15.

Following the termination of the SSA of TFCC, we have revised our FY15-FY16 estimated earnings downwards by 4%-10.0%, respectively, as we have previously factored in the potential earnings contribution from TFCC.

We are maintaining market perform on the stock with an unchanged TP based on 60% discount to its fully diluted revised net asset value (FD RNAV) of RM5.31, as we expect its prospect to remain subdued due to the challenging environment. The applied RNAV discount is much steeper compared to our sector discount average of 44.0% and closer to our FD RNAV discount rate of 65% for UEM Sunrise Bhd.

Risks to our call are failure to meet sales targets and sector risks, including overly negative policies. — Kenanga Research, March 9

This article first appeared in The Edge Financial Daily, on March 10, 2015.