News

IOI Corporation Berhad (IOICORP) announced that it has entered into a conditional asset purchase agreement (APA) with Cremer Oleo GmbH & Co KG (Cremer) to acquire Cremer’s entire oleochemicals businesses in Germany for EUR89.4m (RM433.3m assuming EURMYR at 4.85).

We gather that the deal involves two oleochemical production facilities in Witten and Wittenberge, Germany with a combined processing capacity of 39.2k metric tons (MT)/year.

The deal is targeted for completion by 1QCY16 and not subject to IOICORP’s shareholder approval. However, other conditions are set out in Page 2.

Comments

We are neutral on the acquisition. Although we gather that the acquisition allows IOICORP to further expand into specialty downstream chemical products, we think immediate earnings impact would be minimal, due to the difficult operating environment arising from weak crude oil prices.

We believe the purchase consideration at RM433.3m is fair at 1.0x net book value which is the same valuation as the disposal by Emery Oleochemicals of its Dusseldorf plant to KLK in May 2015.

Post-acquisition, assuming 60:40 debt-equity funding, we expect net gearing to increase slightly from 0.74x to 0.76x, with no meaningful earnings impact.

Outlook

Recall that management expects to see flat CPO prices in the next three months, which is below our forecasted FY15-16E CPO price of RM2,200- 2,400/MT. Nevertheless, our flat FFB growth outlook for IOICORP at 1% (against sector average of 8%) could limit earnings’ upside.

We expect downstream operations to remain challenging in light of weak crude oil prices, but IOICORP’s expansion up the value chain should gradually improve downstream margins.

Forecast

No change to our FY15-16E earnings forecast.

Rating

Maintain MARKET PERFORM

We reiterate our MP call due to the lacklustre near-term CPO outlook and its low FFB growth prospects, which is below sector’s average. Despite a decent long-term downstream outlook, short-term outlook remains competitive on low crude oil prices. IOICORP’s potential re-inclusion into the Syariah compliant list could be a mid-term catalyst.

Valuation

No change to our Target Price of RM4.36, which is based on Fwd. PER of 22.0x on CY15E EPS of 19.8 sen. Our target Fwd. PER of 22.0x reflects a -1.0SD valuation which reflects a weak FFB growth prospect and the challenging downstream industry.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 11 Sep 2015