Highlights

• IOI entered into a conditional asset purchase agreement to acquire Cremer Oleo GmbH & Co KG’s entire oleochemical business in Germany for €89.4m (or RM433.3m).

• Cremer currently has 2 production facilities in Germany, i.e. Witten and Wittenberge, with combined processing capacity of circa 39,200 mt per annum.

• The production plant in Witten offers a broad range of mostly branded oleochemical specialty products for the pharmaceutical, cosmetic, food and performance chemical markets worldwide. On the other hand, the production plant in Wittenberge provides high performance capacities for esterification with multi-step short-path distillation and fractionation of fatty acids and production of medium-chain triglycerides.

• The assets had combined net book value of €90.3m as at 31 Dec 2014. No mention on the earnings track record, as these assets in Germany are only part of Cremer’s businesses.

• The completion of the proposed acquisition will take place 15 days after all conditions are fulfilled.

Pros/Cons

• Positive, as the proposed acquisition will: (1) Expand IOI’s oleochemical business, via the expansion into new product range, which serve the high margin but difficult to penetrate pharmaceutical, cosmetic, food and performance chemical markets worldwide; (2) Mitigates the increased import tariff on Malaysian oleochemical products into EU post Generalised Scheme of Preferences (GSP) withdrawal in 2014; and (3) Enable transfer of advanced technical, R&D, application development and process know-how back to Malaysia (hence benefitting IOI’s existing oleochemical segment). Besides, IOI will establish new production sites in the centre of the EU, by taking advantage of close proximity to key markets in Western Europe and emerging ones in Eastern Europe.

• IOI has no issue in funding the acquisition, given its cash coffer of close to RM1.8bn (as at end-FY06/15). Earnings

Forecasts

• Maintained, pending further update with management.

Risks

• Weaker-than-expected FFB production and OER;
• A sharp increase in production cost; and
• Weaker-than-expected edible oil demand and prices

Rating

HOLD

Positives

• (1) Increasing contribution from oil palm in Indonesia; (2) Strong balance sheet; and (3) Potentially, upside surprises to earnings from JPO.

Negatives

• (1) Less upbeat overall demand outlook for property sector; and (2) low liquidity.

Valuation

• Maintain SOP-derived TP of RM4.03 (see Figure 1), as well as our HOLD recommendation on the stock.

Source: Hong Leong Investment Bank Research - 11 Sep 2015