News  IOI Corporation (“IOICORP”) has announced the final listing reference price for its planned IOI Properties (“IOIPROP”) listing at RM2.51 per share. Accordingly, the Proposed Restricted Offer For Sale (“ROS”) has been fixed at RM1.76. Note that this is a 30% discount to the final listing price.

 Recall that on 14-May-2013, 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.

 Recall also that one IOIPROP shares will be distributed in-specie to IOICORP shareholders for every three IOICORP shares held. Additionally, for every six IOICORP shares held, there will be one IOIPROP (“ROS”) offered at RM1.76 or 30% discount to the final IPO listing price.

Comments  The announced ROS price of RM1.76 is not a surprise to us as we have previously estimated the ROS price to be around RM1.75-RM1.76 per share.

 More importantly, the successful execution of the IOIPROP IPO should bode well for IOICORP valuation as it should regain its status as the biggest pure plantation play stocks among the big cap planters.

Outlook  We have turned positive on IOICORP as we believe its valuation should rerate higher post the demerger exercise. We believe that IOICORP valuation has been suppressed previously due to its significant earnings contribution from property segment. With the successful implementation of the demerger, IOICORP valuation should trade on par with KLK.

Forecast  We have increased our CPO prices forecast for CY14 to RM2800/mt (from RM2700/mt). Hence, FY14E and FY15E core earnings have been increased by 3% each to RM1.78b and RM2.15b respectively.

Rating Upgrade to OUTPERFORM

 We believe that IOICORP may get additional focus from investor in 2014 especially if CPO prices manage to break through RM2700/mt. This is due to its large market cap and pure plantation play once the demerger complete (expected in Jan-2014).

Valuation  We have raised our Target Price to RM6.50 (from RM5.40) based on higher Fwd. PE of 21.2x (from 18.1x) and higher CY14E EPS of 30.7 sen (from 29.8 sen). We have raised IOICORP Fwd. PE to the same level of KLK due to reason specified above. The higher CY14E EPS is in line with our CPO prices estimate increase to RM2800/mt.

Risks  Lower than expected CPO price.

 Lower than expected margin for downstream division.

Source: Kenanga