News    IOI Corporation (IOICORP) has announced its proposal to demerge the property development, property investment and other property-related businesses of IOI Properties (“IOIPROP”). Both IOICORP and IOIPROP will be separate entity post the demerger exercise. The first step is for IOIPROP to issue 3.29b shares to IOICORP at RM4.46/sh or RM14.67b. Subsequently, all IOICORP shareholders will be entitled to IOIPROPs on a 1-for-3 basis (equiv. to 66% of IOIPROP sharebase) while there is a non-renounceable restricted offer for sale (“ROS”) for IOICORP shareholders to subscribe to more IOIPROP shares at 1-for-6 basis at an estimated RM1.75-76 (equiv. to 33% of IOIPROP sharebase) or 33% discount to expected IPO price of RM2.61-RM2.63.  (Refer overleaf for the details).

Comments    We think that the purchase consideration price of RM4.46 per share is fair as it is at 19% discount to the market value of the appraised properties. The 19% discount is in line with the average 20% discount attached to the RNAV for property stocks under our coverage. The estimated ROS Price of RM1.75-RM1.76 also appears to be fair due to its 33% discount.

We are Neutral on the exercise. We do not deny there it will be positive in the long run to spin-off its property division as it will unlock the value of IOICORP property division and potentially allow IOICORP plantation division to rerate higher. However, short term earnings for FY14E could decline by 28% due to absence of property earnings. Also, IOICORP net gearing should increase from 0.3x to 0.5x (above the sector’s average of 0.3x), which could limit their plantation landbanking expansion plans. Nevertheless, we think long term IOICORP shareholders should subscribe to the ROS to avoid dilution in the current IOICORP structure.

Based on IOIPROP transacted value of RM14.7b and assuming no changes to our IOICORP plantation value post exercise, we are looking at a combined value of RM5.84, which is slightly higher than our current IOICORP TP of RM5.40 (pre exercise). This implies that our TP has priced-in most of the exercise.

Outlook   In the longer term, we believe IOICORP may still need to address the issue of its aging palm oil tree age profile to boost its FFB growth. Our estimate show that IOICORP age profile of ~14 years old is the second highest in the industry after FGV.

Forecast   We are maintaining our FY13E-FY14E core net profits of RM1.51b-RM1.73b. We will revisit our earnings estimate when the property listing materialises.

Rating Maintain MARKET PERFORM

Valuation    Maintain our Target Price of RM5.40 based on an unchanged Fwd. PER of 18.1x on CY14E EPS of 29.8 sen. 

Risks   Lower than expected CPO prices.

Source: Kenanga