• The Star reported that IOI Corporation is a leading candidate to take over IJM Plantations (IJMP). IJMP has emerged as a takeover target as demand picks up for mature plantations in Sabah.

• In May 2017, Bloomberg reported that IJM Corporation may consider paring its 56.2% stake in IJM Plantations through local or foreign partnerships that may contribute to a larger plantation landbank for the unit.

• We are unsure if IOI would take over IJMP completely or just IJM Corporation’s 56.2% stake in IJMP. Acquiring IJM Corporations’ 56.2% stake in IJMP would be enough for IOI to consolidate and control IJMP’s earnings.

• Assuming a 15% premium to IJMP’s current share price of RM2.25/share would imply a takeover price of RM2.59/share. This would translate into a FYE3/20F PE of 21.8x.

• Our current fair value of RM2.40/share for IJMP is based on a FYE3/20F PE of 20x. We have assumed an average CPO price of RM2,500/tonne for FYE3/20F.

• It would cost IOI about RM2,280.8mil to acquire 100% of IJMP based on a takeover price of RM2.59/share. The hypothetical acquisition price of RM2280.8mil, assumption of IJMP’s net debt of RM516.1mil and planted landbank of 60,981ha would translate into an EV of roughly RM46,000/ha. IOI’s gross cash reserves stood at RM3.7bil as at end-March 2018.

• The 100% acquisition of IJMP would only improve IOI’s FYE6/20F net profit by less than 5%. Based on IJMP’s FYE3/19F’s net profit of RM58.8mil, the acquisition would not be earningsaccretive for IOI in FYE6/19F as the loss of interest income would more than offset IJMP’s earnings contribution. IOI’s earnings base is almost 10x larger than IJMP. IOI is currently trading at FYE6/19F PE of 26.8x compared with IJMP’s FYE3/19F PE of 33.7x.

• In the long term however, IOI would benefit from IJMP’s young oil palm trees in Indonesia. The acquisition of IJMP would increase IOI’s planted landbank by 35% to 235,377ha. IOI would also gain exposure to IJMP’s planted landbank of 35,831ha in Indonesia. IJMP’s Indonesia unit recorded an EBITDA of RM90.5mil and pre-tax loss of RM2.5mil in FYE3/18.

• IJMP would help reduce the average age of IOI’s oil palm trees. Average age of IOI’s oil palm trees is currently less than 14 years old vs. 9.9 years old for IJMP.

• Maintain HOLD on IOI with a fair value of RM4.30/share and IJMP with a fair value of RM2.40/share.

Source: AmInvest Research - 7 Aug 2018