What’s New

• IOI Corporation Berhad (IOI) has entered into a definitive sale and purchase agreement with Bunge Limited (Bunge) to sell a 70% controlling stake in IOI Loders Croklaan (Loders) and its related businesses for a total consideration of Euro 297 million plus US Dollars 595 million, subject to certain adjustments to be determined at the closing of the transaction.

• The transaction is expected to close within the next 12 months and subject to regulatory and other customary approvals which include the approval of IOI’s shareholder.

Comment

• Total proceeds of the divestment could be c.RM4,001.4m with the assumption of RM5.03/Euro and RM4.21/USD.

• IOI remains as a major supplier of palm oil and palm products to Loders after transaction. We also learnt that IOI will have 2 representatives on Loder’s five-member Board of directors after the transaction, therefore we believe affected earnings with be limited to 70% of specialty oil fats sub-segments.

• Positive view on the divestment given historically low plant utilization rate for Specialty Oils and fats. We understand that plant utilization rates for specialty oils and fats were low since FY2013 (56%). According to data shown in FY2016 IOI’s annual report, the plant utilization rate for FY16 went down to 47% with sales of 782,972 MT. Nevertheless, given the complementary nature of Loders and Bunge’s asset base and product offerings, we opine that assets able generate more value after the transaction. Meanwhile, IOI enable to enjoy the result from the associate (remain 30% stakes).
   
• Proceeds from the divestment could be utilized to pare down borrowings. Net gearing ratio in 4QFY17 stood at 0.78 times. If IOI utilizes all the proceeds from the divestment of c.RM4b to pare down its borrowing, net gearing will be reduced to 0.25 times.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY18 and FY19 in view of the transaction could span 12 months to be completed.

Valuation & Recommendation

• Maintain HOLD with unchanged target price of RM4.16. Our target price is now pegged at PE of 25x FY18F EPS. The assigned PER is at 5-year historical mean PE of the Group and equivalent to valuation of other big-cap planters. At this junction, we do not foresee any immediate catalyst to drive the Group’s share price with unfavourable risk-reward.

Source: JF Apex Securities Research - 18 Sept 2017