Ringgit slide may have driven IOI’s Taipei 101 move

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AS THE ringgit fell to its weakest level in five years, murmurs in corporate circles have it that IOI Properties Group Bhd’s (IOIPG) move to acquire a sizeable stake in the iconic Taipei 101 Tower was partly motivated by concerns over a further slide in the local currency.

Corporate observers point out that the size of the deal —  TWD25.14 billion (RM2.74 billion) for a 37.17% stake in Taipei 101’s parent company Taipei Financial Center Corp (TFCC) — amounts to over a third of IOIPG’s market capitalisation of RM7.61 billion.

The purchase would also significantly raise IOIPG’s net gearing from 0.16 to 0.4 times, with new borrowings to be incurred, thus potentially crimping major expansion in the immediate future. A net gearing of 0.5 times is the optimum level for property companies.

While this is undoubtedly a huge investment commitment, IOIPG has said it would not seek management control of TFCC. Meanwhile, analysts have only estimated a decent, but not generous, return of about 5% based on the rental rates of Taipei 101.

IOIPG remains reticent about the deal, which has faced strong opposition from Taiwanese politicians as well as shareholders of Taipei 101.

At press time, there was still fierce debate in Taiwan’s political and corporate circles on whether to allow a foreign-owned entity to acquire a sizeable stake in TFCC. If the deal goes through, IOIPG would become the second largest owner of Taipei 101, after the Taiwanese government, which has a 44.35% stake.

“For the hassle, the rationale of the deal has to be more than just the usual long-term capital appreciation and rental return from the iconic building. If one takes the view that the ringgit would continue to weaken, it seems a good diversification strategy to mitigate this risk, especially if IOIPG were to borrow in ringgit to fund the deal,” says a corporate observer.

IOIPG will pay for the stake in TFCC wholly in the new Taiwan dollar.

Last week, the ringgit fell to a new five-year low, slumping to an intraday low of 3.5073 against USD. Over the past 90 days, USD has gained 8.81% (see chart) against the ringgit and 4.11% against TWD.

Year to date as at Dec 10, USD had gained 6.17% against the ringgit and a smaller 4.7% against TWD. The ringgit has depreciated 1.45% against TWD since the beginning of the year and 5.6% since 2012.

A market observer, who only wants to be known as Ng, opines that IOIPG’s huge investment in Taiwan could reflect lack of confidence in the ringgit.

“If the ringgit depreciates further in the future while the value of Taipei 101 appreciates over time, IOIPG would be able to gain from two aspects — the capital appreciation of the property as well as the strengthening of TWD. In a way, the company is taking a negative view on the ringgit.”

Meanwhile, a market analyst with a local equity research firm says IOIPG is looking at a longer time horizon to buffer itself against any further weakness in the ringgit. “With the recurring income and capital appreciation in TWD, IOIPG will benefit if TWD proves more resilient than the ringgit over time,” she says.

An equity analyst with an investment bank says it has become common for Malaysian business tycoons, high net worth individuals and local companies to own foreign assets and collect offshore recurring income, especially when they anticipate the ringgit to depreciate. “It’s a way to preserve capital. When you expect the ringgit to fall, borrow the money (in ringgit) and park it somewhere else,” he says.

Most market observers and research analysts who spoke to The Edge on condition of anonymity due to the sensitivity of the issue expect the ringgit to depreciate further next year.

“There is growing concern that Malaysia will miss its fiscal deficit target, and hence, the ringgit is not going to do well,” one of them says.

Some analysts expect the ringgit to depreciate to 3.60 per USD by 2015 before averaging between 3.30 and 3.50 for the full year.

To recap, IOIPG has signed conditional share sale agreements to acquire 37.17% equity interest in TFCC from four subsidiaries of Ting Hsin International Group, subject to the approval of the Investment Commission of Taiwan.

It has been widely reported that Ting Hsin was forced to dispose of its investments in TFCC after being hit financially by investigations into the alleged sale of tainted cooking oil by one of its subsidiaries. Ting Hsin is the parent company of Hong Kong-listed Tingyi Cayman Islands Holding Corp and maker of China’s popular Master Kong instant noodles.

Nonetheless, the hefty price tag for TFCC or Taipei 101 shows that it is far from a distressed sale by Ting Hsin, which is selling its stake at a premium of about 70% to TFCC’s net book value, and triple the amount it paid for the stake five years ago. TFCC’s total net book value stood at about RM4.32 billion, or RM1.61 billion for the 37.17% stake.

For IOIPG, even after including a pending rights issue to raise RM1.03 billion from shareholders, which is to fund investment properties at IOI Resort City, the group’s net gearing would be at 0.37 times post the TFCC deal, thus leaving limited space for another major acquisition in the immediate future.

RHB Research Institute property analyst Loong Kok Wen says while shareholders of IOIPG could benefit from the steady rental income from Taipei 101, this will be offset by interest expense as well as the dilution of earnings per share after the rights issue.

“Much of this is a scarcity premium, considering the opportunity to buy an iconic building doesn’t come very often. But the net positive [impact] is very minimal,” she tells The Edge.

Nevertheless, she says Taipei 101, which provides a gross yield of 5%, seems attractive compared with the market average of about 2.5% to 3% in Taipei.

Last week, Taiwanese lawmakers expressed concern about foreign interests acquiring a sizeable stake in the national landmark, while the relevant regulatory body on investment affairs also said it will review the deal thoroughly.

IOIPG has issued a statement saying that it has no political intent in the acquisition of the TFCC stake from Ting Hsin.

“We are sincere in our approach to the proposed acquisition and if the said proposal goes through, we will abide by Taiwanese laws in all respects. IOI Properties is apolitical and has no hidden political agenda behind the proposed acquisition,” it said.

This is not the first time IOI Group, controlled by tycoon Tan Sri Lee Shin Cheng, has had its eye on iconic landmarks. In 2009, there were news reports that the group had made a bid for HSBC Tower in London, reportedly for about £800 million, but the sale did not go through for unknown reasons.  

Earlier in 2008, the group won a bid to buy Menara Citibank in Kuala Lumpur for a gross acquisition value of RM734 million, but it aborted the deal with the forfeiture of the deposit just as the US subprime crisis began to unfold.

This article first appeared in The Edge Malaysia Weekly, on December 15 - 21, 2014.