News

IOIC proposed 2 major exercises, involving: (1) An internal reorganization to streamline its property assets into IOI Properties Group Sdn Bhd (IOIP Group); and (2) Followed by an initial public offering of IOIP Group on the Main Board of Bursa Malaysia via the distribution-in-specie involving 2/3 of the enlarged IOIP Group to IOIC shareholders on the basis of 1 IOIP Group share for every 3 IOIC shares and non-renounceable restricted offer for sale of 1/3 of the enlarged IOIP Group to IOIC’s shareholders at 30% discount to the final listing reference price.

The entire exercise is expected to complete by mid-Dec 13.

Working backwards (assuming the expected proceeds from the ROS is at 30% discount), the total market capitalization will worth RM8.2bn. However, we believe the market capitalization would fetch up to RM11.9bn, should the properties eventually be revalued to the independent valuers’ market prices (i.e. RM18.165bn) vs. injection price of RM14.7bn. Financial Impact

Based on our estimates, the demerger exercise will reduce our FY06/14-15 net profit forecasts by 16.8-22.4%, assuming the entire exercise to complete by end-2013. In terms of balance sheet, the demerger exercise will bring net gearing up from 0.3x (as at 30 Jun 2012) to 0.48x (assuming full exercise of outstanding ESOS).

Pros / Cons

Positive, as it unlocks the property business’ value and allows IOIC shareholders to participate in the ROS at 30% discount to the final listing reference price.

The exercise values IOIP Group at RM8.2-119bn. This is higher than our original RM6bn attributed to the property arm in our SOP valuation.

Risks

• Downside risks – (1) Recovery in global vegetable oil production may result in a sharp plunge in vegetable oil prices; and (2) Economic uncertainties in world’s major economies that may hurt demand and prices of edible oil (including palm oil).

Forecasts

Maintained for now, pending completion of the demerger exercise.

Rating

HOLD

• Positives – (1) Value accretive demerger; (2) Strong balance sheet; and (3) Unlocking of property assets.
• Negatives – Weak near-term upstream plantation sector outlook.

Valuation

With the proposed demerger exercise that is value accretive, we are raising our SOP-derived TP on IOIC to RM4.97, as we now value the property business based on the average of asset injection price and the market value provided by the independent valuers. Correspondingly, our recommendation on the stock is upgraded from Sell to HOLD.

Source: Hong Leong Investment Bank Research - 15 May 2013