Highlights

• IOI announced that it has entered into a definitive sale and purchase agreement to dispose a 70% stake in IOI Loders Croklaan (Loders) and its related businesses for €297m plus US$595m (translating to RM3.94bn).
• Out of the RM3.94bn disposal proceeds, IOI intends to utilize: (1) 30% as working capital/ future investment opportunities; (2) 50% to repay borrowings (which will in turn result in interest savings of RM58.3m p.a.); and (3) 20% as dividends to shareholders (which translates to DPS of 13 sen and dividend yield of 2.9%).
• Post disposal, IOI will remain a vital partner in supporting Loder’s growth, given IOI’s expertise in palm oil sourcing and experience in the fast-growing Asia Pacific region.
• The proposed disposal is expected to complete by 4Q 2018.

Comments

• Impact on earnings… IOI is expected to record a gain of RM2,505.8m from the proposed disposal and re- measurement of its remaining 30% stake in Loders. Disposal and revaluation gain aside, we expect minimal impact on IOI’s earnings given: (1) loss of earnings contribution will likely be partly offset by lower interest expense (in FY17, Loders and the related businesses contributed to about 18% of IOI’s reported earnings); and (2) IOI’s large earnings base.
• Impact on balance sheet… The disposal will bring down IOI’s net debt and net gearing from RM5.44bn and 0.76x (as at end-FY16) to RM2.93bn and 0.34x.
• We are positive on the latest development, as the proposed disposal allows IOI to: (1) monetize its investment at an attractive consideration (P/E of >40x based on FY17 core PAT); (2) reduce its net gearing position.

Risks

• Sharp fall in FFB output and/or palm product prices;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Forecasts

• Maintain for now, pending completion of the disposal.

Rating

HOLD ↔

• While we like IOI for its efficient plantation management (evidenced by its superior FFB yield vis-à-vis the industry average), and strong operating cash flow generation, further upside is capped by its lofty valuation (FY17-18 P/E of 23.2x and 21.4x respectively). Valuation
• SOP-derived TP raised by 8.7% to RM4.76 to reflect the expected disposal proceeds and loss of income from Loders and its related businesses. Maintain HOLD as valuation remains stretched.

Source: Hong Leong Investment Bank Research - 13 Sep 2017