News  IOI Corporation (IOICORP) has announced the acquisition of 339m shares (or 39.55%) of UnicoDesa Plantation (UNICO) for RM397m or RM1.17 per share. Accordingly, IOICORP is obligated to make a mandatory take-over offer (MGO) to acquire the remaining 518.1m of UNICO shares (or the balance 60.45%) at the same offer price of RM1.17 per share. (Details in Page 2).

 UNICO owns 13,660 hectares of plantation estates (planted: 12,700 ha) in Kinabatangan and Lahad Datu, Sabah.

Comments  The news is not surprising as it was already reported by The Edge on 25 Sep. 2013 that Unico Holdings, the parent company of UNICO had issued a press statement stating its intention to offload almost 30% stake in UNICO and seeking approval in an EGM on the same day.

 The offer translates into a price of RM73,400 per ha, which is fair, in our view. Note that this valuation is close to the recently completed acquisition of Pontian at around RM75,000/ha by Felda Global Ventures at the same location in Kinabatangan and Lahad Datu.

 We are positive on the deal as IOICORP’s landbank will be increased by 13,660 ha (or 7.5%) to 196,867ha. UNICO's FFB yield of 23.8 MT/ha is also commendable against the average yield of 20.4 MT/ha in Sabah. Synergy can also be realized as both IOICORP and UNICO have landbank in Kinabatangan and Lahad Datu, Sabah. Additionally, IOICORP has a refinery in Sandakan, Sabah.

 Balance sheet impact is minimal as we expect IOICORP’s net gearing to increase to 0.39x (from 0.32x currently).

Outlook  The news is positive but current low CPO prices is capping IOICORP upside potential.

Forecast  FY15E earnings may increase by 2%-4% depending on the level of acceptance of the MGO. At the minimum level of 40%, we expect FY15E earnings to increase 2% to RM2.12b. However, FY15E core earnings could rise 4% to RM2.17b if IOICORP manages to secure 100% acceptance. At this juncture, we maintain our FY14E and FY15E core net profits of RM1.73b and RM2.09b, respectively.

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 29.8sen.

Risks to Our Call   Lower than expected CPO prices.

Source: Kenanga