This article first appeared in The Edge Malaysia Weekly on October 11, 2021 - October 17, 2021

GLOVEMAKER Rubberex Corp (M) Bhd, which is controlled by businessman Datuk Eddie Ong Choo Meng, took the market by surprise last week when it announced its proposal to take up a 20% stake in Empire City Mall in Petaling Jaya for RM180 million cash, as well as its diversification into property investment, which includes shopping malls.

Looking at Rubberex’s cash balance of RM240.9 million as at June, with borrowings of just RM4.3 million, it can comfortably afford the stake. However, some took to investment blogs to question the deal, in particular why Rubberex would leave its comfort zone of glove manufacturing to go into property investment — and that too, into a mall that has yet to be completed.

The mall is part of the RM5 billion Empire City Damansara project that was launched by Mammoth Empire Holding Sdn Bhd (MEH) back in 2011. It is now targeted to be completed by the third quarter of 2023, and slated to open in the first quarter of 2024.

In an email response to The Edge, Rubberex says it views its diversification into property investment favourably, in particular shopping and leisure activities, which are expected to gain traction once the economy recovers. “We are confident of our investment in this mall, together with the partnership of such established developers, [and] are looking forward to a sustainable share of the profits when the mall is completed in the next two years.

“We are looking at the medium to long-term prospects, where possibly within the next two to three years, the global and Malaysian economies would have recovered from the pandemic with the commercial and retail sectors gradually reopening. A mall the size and ambition of Empire City Mall would have much to offer and attract in terms of shopping, dining and recreation — to both local and international tourists.”

The deal will see Rubberex undertake a joint collaboration with Alliance Premier Sdn Bhd, Exsim Holdings Sdn Bhd and JT Momentum Sdn Bhd for the development and operation of the mall, via their subscription in a special purpose vehicle called Alliance Empire Sdn Bhd. The registered proprietor for the mall is Cosmopolitan Avenue Sdn Bhd.

In essence, the shareholders of Alliance Empire will be Alliance Premier with a 60% stake, Exsim and JT Momentum, which will collectively hold 20%, and Rubberex with the remaining 20%.

Knight Frank, the independent registered valuer for the deal, has ascribed a market value of RM1 billion for the mall at the Certificate of Compliance and Completion (CCC) stage.

The carrying value of the mall is RM480 million, with the estimated cost to complete the construction amounting to RM270 million — which works out to a fair value gain of RM250 million for the shareholders of Alliance Empire.

Alliance Premier and Cosmopolitan Avenue are the vehicles of MEH directors Datuk Sean Ng Yee Teck and Datuk Danny Cheah Joi Yong. Exsim is run by brothers Lim Aik Hoe, Lim Aik Kiat and Lim Aik Fu, while JT Momentum is the vehicle of Datuk Jackson Tan Kak Seng.

A market value of RM1 billion works out to RM571 per sq ft for the mall, which will have a net lettable area (NLA) of 1.75 million sq ft. By comparison, the 1.77 million sq ft Sunway Pyramid shopping mall, which is part of Sunway Real Estate Investment Trust, had an appraised value of RM3.83 billion as at June 30 last year, which works out to RM2,159 per sq ft.

“In my opinion, the RM1 billion market value ascribed is fair and is a conservative amount, given the long gestation period for the project to complete, and the fact it is currently without any big name tenants. Its similarity with Sunway Pyramid ends with the NLA, as Sunway is almost fully tenanted (97.6% as at June last year) and with quality tenants,” a valuer who requested anonymity tells The Edge.

When asked what is the value that Rubberex sees in Empire, given that it is currently incomplete and without guaranteed tenants, the company says the investment prospects were “compelling by nature”. “With Empire City Mall at the present time being close to full completion and its prospective value by then of RM1 billion, this investment prospect was compelling by nature.

“Having studied the market feasibility plans and understood the mall’s many unique propositions and strengths, we believe our investment is justified. We understand the risks and challenges inherent in a monetary investment such as this and have in place adequate protective clauses in our agreements with the parties.”

In its announcement last Monday, Rubberex said its diversification exercise comes at a time when the rubber glove industry’s outlook seems to be “waning from its peak of supernormal profits and sky-high average selling prices towards normalisation as Malaysia and the rest of the world enters the endemic phase of the Covid-19 pandemic”.

ExaStrata Solutions Sdn Bhd CEO Adzman Shah says that historically, glove companies such as Top Glove Corp Bhd and Supermax Corp Bhd have also favoured property investments. “At a time when the retail market is soft, prices and rental rates have also been soft. For certain properties with potential for development, it is a good opportunity to take a position in property when prices are more reasonable,” he tells The Edge.

“There are also opportunities to capitalise on the economic recovery as well as the capital investment that has been sunk into existing developments such as Empire City. However, it remains to be seen how much more investment is needed to complete it as the development has yet to be fully completed and certain rectifications may be required due to its current state. The existing building can also be remodelled for other alternative use and therefore, a proper market study can perhaps provide good ideas on how to optimise the usage and value of the property.”

He adds that the location of Empire City Mall is rather mature as there are a few other malls within a 5km radius. “Nevertheless, the growing population density surrounding the site will certainly be able to support a mall in the long term, provided that it takes into account the needs and requirements of the catchment population and provides a unique selling proposition in terms of concept and positioning.

“To ensure the success of the mall, the financial strength of the owners is important. Retail requires a lot of investment up front and will need a few years to gestate and establish.”

A fund manager who requested anonymity tells The Edge that property has always been a popular diversification choice for owners with money and who want a low-risk investment. “It is based on the belief that whatever happens to the business outlook, the value of the investment is preserved in the hard property asset. At worst, the property is worth something and the recovery value will not be zero,” he says.

“However, the return on investment based on the current outlook does not seem exciting. An important point to note is that most property companies are trading below their net book value. In the case of Rubberex, the RM180 million spent to acquire the 20% stake in the mall may not be fully reflected in its share price.”

Rubberex’s share price closed at 59.5 sen last Friday, giving the company a market capitalisation of RM522 million.

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