IOI has sold down its equity stake in Bunge Loders Croklaan Group B.V. (“BLC”) from 30% to 20% for approximately RM466m. The Group will probably apply the proceeds to trim debts and strengthen its expansion war chest. It is noteworthy that the divestment is part of a put and call option agreement inked in 2018 when IOI sold its 70% equity in Loders Croklaan (since renamed to BLC) to Bunge. IOI will suffer a one-off fair value loss of about RM50m but otherwise, the impact on future core earnings is minimal (<3%). We are keeping FY22-23E core EPS (CEPS) intact. A special dividend is possible but speculative at this juncture. Pending the Group’s 4QFY22 results later this month, we are maintaining our MP rating and TP of RM4.65. Our TP is currently based on target 16x PER on FY22E CEPS which will be updated to FY23 CEPS pending IOI’s 4QFY22 results announcement in late August.

Loders Croklaan: IOI acquired 100% of Loder Croklaan from Unilever in 2002 and expanded it significantly before trimming its holding in March 2018. By then Loder Croklaan had expanded from just three plants in 2002 to seven with operations across Asia, Europe and North American. Bunge paid RM3,718m for the 70% stake in 2018 to give IOI a disposal net gain of RM1,199m. However, the disposal also meant: (a) an upward revaluation of the remaining 30% equity still held by IOI from RM1,079m to RM1,379m; and (b) the crystallisation of RM163m in net derivative financial assets due to a put and call option which allow Bunge or IOI to buy or sell the remaining 30% stake within a 5-year period.

10% BLC divestment: This divestment is part of the put and call option agreed on 1 March 2018 between Bunge and IOI. Bunge probably triggered the call option as the specialty oils and fats division is strategic to Bunge, contributing 20-30% to earnings and results over the past few years have been encouraging – despite losses in recent quarters after an exceptional FY21. For IOI, it will face a small annual dent of 2-3% to CNP and about RM50m in write-down in net financial derivative assets as the put and call options have been terminated following this sell down. However, disposal gain or loss is negligible as the price is close to carrying value and average disposal PER of about 20x is fair (after a stellar FY21, BLC is loss-making YTD FY22). IOI’s sales of certified palm oil to BLC is also unlikely to be affected.

De-gearing, special dividends and/or expansion: If IOI apply the entire proceeds of RM466m to pare down net debt of RM2,753m (as at 31 March 2022), its net gearing of 26% should fall to 22%. As we also expected robust cash flows for 4QFY22 thanks to firm CPO prices, it is unclear whether the Group will declare a special dividend following this sell down. Pending 4QFY22 results later this month, we are maintaining FY22E DPS at 13.0 sen. The improving balance sheet will support its expansion plans, though upstream acquisition may be less likely for the next year or so due to high asking prices. Downstream expansion is possible but slowing global economic outlook may curb such ambition unless rising energy cost and insecurity in the European chemical sector cause major capacity cuts or closures thus opening expansion possibilities for integrated plantation players such as IOI.

Maintain MP and TP of RM4.65. We like IOI’s strong agri-land backed balance sheet, good ESG record with high rating of 81% and exposure to firm CPO, and indirectly energy, prices. However, it is trading at premium to peers with limited growth opportunity in FY23. Upstream expansion in Indonesia will probably be undertaken by its 32% associate, Bumitama, leaving a smaller space for Malaysia. Downstream opportunities may emerge but will remain competitive.

Source: Kenanga Research - 8 Aug 2022