THE BUZZ
According to Channel News Asia, Indonesian plantationcompany Bumitama Agri lodged its prospectus with the Monetary Authority ofSingapore on Monday for listing on the Singapore Exchange. The IPO could raiseas much as SGD200m, which will be used for new planting. Indonesia's HaritaGroup and palm oil firm IOI Malaysia are two of Bumitama's controllingshareholders.
Separately, The Edge reported that IOI Corp is set to make apaper gain of USD226m from the dilution of its stake from 36.0% to 30.4%.
OUR TAKE
We understandthat Bumitama has a nucleus planted area of about 90kha, with an weighted average tree ageof about 5 years old. While we do not doubt Bumitama's IPO could do well givenits impressive list of cornerstone investors, we do not think the IPO will haveany positive impact on IOI Corp's stock price. This is because the offering will be priced at around 11-12x PE compared to IOI's own PE of around16x.
Bumitama is poised toshow strong production growth given its abundant newly matured areas, which will see fresh fruit bunch (FFB) production accelerate in the next 5'6 years.However, we do believe that the yield drag factor will be quite significant and could undermine its near-term profitability.Hence, investors buying into Bumitama's IPO will need to take a longer terminvestment horizon. Bumitama's young tree age profile nicely complements IOI'saging tree profile. Hence, if IOI were to raise its stake in Bumitama fromone-third to above 50%, it could be very positive for IOI's stock price as thiswill significantly boost its FFB production growth going forward.
We are maintaining our Sell call on IOI in view of its rich valuation relative to otherpurer and bigger plantation names, most of which can be bought at the low teensCY12 PE. We also do not think the market will be excited about the USD226mone-off gain arising from the deemed disposal in Bumitama.