IOI Corporation Berhad - Divesting 70% of IOI Loders Croklaan

Date: 13/09/2017

Source  :  KENANGA
Stock  :  IOICORP       Price Target  :  5.10      |      Price Call  :  BUY
        Last Price  :  4.57      |      Upside/Downside  :  +0.53 (11.60%)

IOICORP announced it is selling a 70% stake in IOI Loders Croklaan (Loders) for EUR297m plus USD595m (totalling RM4.0b). This comes as a positive surprise as we find the impact to be earnings neutral for FY19, while slashing FY18 net gearing position to 0.1x (from 0.6x). We trim FY18-19E CNPs by 5-1% as lower Loders contribution is offset by lower net interest cost. Maintain OUTPERFORM with lower TP of RM5.10 post-earnings cut.

Disposing specialty fats business. IOI Corporation Berhad (IOICORP) announced that it has entered into a definitive S&P with Bunge Limited (Bunge) to sell a 70% controlling stake in IOI Loders Croklaan (Loders) for EUR297m plus USD595m (RM4.0b in total), which values the entire Loders business at EUR425m plus USD850m (RM5.7b). Management expects to record a disposal gain of RM2.5b from the disposal and revaluation of the remaining 30% stake in Loders. As part of the conditions precedent, IOICORP is required to restructure the Loders business to acquire IOICORP’s interest in IOI Lipid Enzymtec Sdn Bhd and IOI Edible Oils (HK) Limited. However, the disposal excludes IOICORP’s IOI Loders Croklaan SC B.V. in Netherlands and Soyuz Loders Croklaan Corporation (its Russia offices). The transaction is slated for completion in the next 12 months. Post-transaction, IOICORP will have two representatives in the Loders’ five-member board and continues to be a major supplier to Loders. Note that the Loders business is focused on the specialty oils and fats (specialty fats) sub-segment of IOICORP’s downstream segment, with the other two remaining sub-segments being refining and oleochemicals.

Earnings neutral by FY19. While the news comes as a surprise, we are generally positive on the deal as we expect it to turn earnings neutral by FY19 with the lower earnings contribution offset by lower interest cost. Meanwhile, net gearing could drop substantially from 0.6x to 0.1x in FY18. With a production capacity of c.1.0m MT, we estimate a valuation of RM5,700/MT of capacity, which we find slightly lower than a previous fatty esters plant expansion costing RM130m for 20k MT, or RM6,500/MT of capacity. However, we believe this discount is fair given the substantially larger capacity, as well as taking into account depreciation. Management noted an EV/EBITDA ratio of c.13x on the disposal, which compares favourably to comparable downstream companies with a range of EV/EBITDA between 6.5x to 13.3x. We estimate the sale to slash IOICORP’s FY18-19E net gearing position from 0.6-0.5x to 0.1x and <0.1x by FY19E.

Lower FY18-19E CNPs by 5-1% to RM1.17-1.30b as we impute the net effect of lower Loders contribution offset by the subsequent associate contribution and lower net interest cost. We have imputed the one-off disposal gains of RM2.5b into our net profit estimates as well.

Maintain OUTPERFORM with lower TP of RM5.10 (from RM5.25) after accounting for lower CY18E EPS of 19.7 sen (from 20.3 sen). Our Fwd. PER is unchanged at 25.9x based on unchanged mean valuation, in line with our valuation for planters with average FFB growth outlook. Although IOICORP is disposing of a substantial chunk of its specialty fats business, we note that it is retains its existing oleochemical capacity of c.750k MT and two refineries in Malaysia, which should continue to contribute positively to the downstream sub-segment. Management has noted that it intends to utilize c.20% of the proceeds for additional dividend, indicatively of 13.0 sen which adds up to FY19 DPS of 24.4 sen or a dividend yield of 5.4%. We believe this could provide a re-rating catalyst for IOICORP, which has lagged behind other large-cap planters in recent months.

Source: Kenanga Research - 13 Sept 2017

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