IOI Properties Group Bhd
(Dec 10, RM2.35)
Downgrade to ‘neutral’ with a lower target price (TP) of RM2.63 from RM3.10. IOI Properties Group’s (IOIPG) proposed acquisition of a 37.17% stake in Taipei 101 (pic) costs NT$25.14bn (RM2.74 billion). The building comprises office space and retail components with 1.95 million and 0.41 million sq ft of net lettable asset, respectively. The shopping mall is fully tenanted, while the occupancy rate of the office segment is about 96%. The properties are occupied by 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 first quarter 2015, and is not subject to the approval of IOIPG’s shareholders.

Given the average rental of NT$420 psf and NT$77 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% to 3% 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.

We believe part of the proceeds of RM1.03 billion from the recent rights issue exercise (one-for-six @ RM1.90 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%.

We raise our financial year 2016 (FY16) and FY17 earnings forecasts by 6% and 2% to reflect the impact of the proposed acquisition. 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 of gross domestic product growth. We lower our TP based on a larger discount to revalued net asset valuation of 40% (from 30%). — RHB Research, Dec 10

This article first appeared in The Edge Financial Daily, on December 11, 2014.