IOIC’s long-awaited proposed demerger of its property assets has been announced. All in, we believe there is not much upside left to be gained from buying IOIC shares, given the recent 9.2% run-up in share prices over the last three trading days. We estimate minimal potential upside at 3.4-7.3%, based on several scenarios.  

♦  IOIC has proposed to undertake an internal reorganization to streamline its property assets into a Listco. This will be followed by an initial public offering (IPO) of Listco on Bursa Malaysia, which will entail a full demerger of Listco from IOIC, via: 1) a proposed distribution-in-specie of 2/3 of the enlarged issued capital of Listco on a 1-for-3 basis; and 2) a proposed restricted offer for sale (ROS) of 1/3 of the enlarged issued capital of Listco on a 1-for-6 basis, to be offered at a 30% discount to listing price.

 
♦  We have done a calculation of the value of IOIC shares to IOIC shareholders, and compared it to IOIC’s current market value and the outlay required to take part in the ROS. Based on our estimates, it would seem that based on current share price of IOIC of MYR5.46/share, and assuming Listco trades at its estimated listing price of MYR2.50/share, that IOIC shares are fairly valued at current price. This is partly due to the fact that IOIC’s share price has appreciated by 9.2% over the last three trading days. However, we believe the main variable is the value of Listco upon listing, and whether Listco shares would rerate higher. Should Listco’s shares rerate upwards to trade at between 25-35% discount to RNAV, there could be some upside for IOIC of about 3.4-7.3%.  

♦  We maintain our NEUTRAL recommendation. We have now restructured our fair value for IOIC to only take into account only the plantations and manufacturing businesses, while adding in the dividend-in-specie in the form of free Listco shares and the discount for the ROS shares. Our fair value is therefore raised to MYR5.46 (from MYR5.20). In the immediate term, while earnings from IOIC’s upstream plantations division are expected to be weak going forward due to lacklustre CPO prices, this would be somewhat offset by better prospects at its downstream operations, as margins continue to  improve. In the medium term, once his whole exercise is completed, we highlight that IOIC’s earnings would shrink by 20-25%, as there would be no more property contributions.

Source: RHB