IOI’s divestment of Loders a positive surprise

KUCHING: IOI Corporation Bhd’s (IOI) announcement of the divestment in IOI Loders Croklaan (Loders) has been viewed by analysts as a positive surprise.

In a filing on Bursa Malaysia, IOI announced the company has entered into a definitive sale and purchase agreement with Bunge Ltd (Bunge) to sell a 70 per cent controlling stake in Loders and its related businesses for a total consideration of 297 million euros plus US$595 million, subject to certain adjustments to be determined at the closing of the transaction.

“This values the entire Loders and its related businesses at 425 million euros plus US$850 million, net of external debt and cash and including normalised working capital.

“The transaction is expected to close within the next 12 months, subject to regulatory and other customary approvals which include the approval of IOI’s shareholders,” IOI said.

While the news came as a surprise, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) was generally positive on the deal.

Kenanga Research expected it to turn earnings neutral by financial year 2019 (FY19) with the lower earnings contribution offset by lower interest cost.

“Meanwhile, net gearing could drop substantially from 0.6-fold to 0.1-fold in FY18,” the research arm said.

With a production capacity of circa one million metric tonnes (MT), Kenanga Research estimated a valuation of RM5,700 per MT of capacity, which it found slightly lower than a previous fatty esters plant expansion costing RM130 million for 20,000 MT, or RM6,500 per MT of capacity.

However, the research arm believed this discount was fair given the substantially larger capacity, as well as taking into account depreciation.

Management noted an equity value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of circa 13-fold on the disposal, which Keannga Research found compares favourably to comparable downstream companies with a range of EV/EBITDA between 6.5-fold to 13.3-fold.

“We estimate the sale to slash IOI’s FY18-19E net gearing position from 0.6-0.5-fold to 0.1-fold and less than 0.1-fold by FY19E,” it said.

With IOI planning to distribute RM788 million (or 20 per cent of the amount) out of the proceeds of RM3.94 billion as dividend to shareholders within the next 12 months, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) has increased its FY18 dividend by the similar amount to total 23 sen representing attractive yield of 5.1 per cent.

As for IOI’s FY19 net income, MIDF Research noted that it has been boosted by the gain on disposal of RM2.51 billion to RM3.79 billion.

“However, core net income (CNI) is reduced by two per cent to RM1.25 billion to reflect lower earnings contribution from Loders,” it said.

Despite the lower FY19 CNI, the research arm did not discount the possibility that IOI may expand the group’s upstream plantation with the proceeds which will improve FY19 CNI.

Net gearing is expected by the research arm to decline to 0.25-fold, from 0.78-fold as of end-June 2017.

Meanwhile, Kenanga Research lowered FY18 to FY19E core net profits (CNPs) by five-one per cent to RM1.17 billion-RM1.3 billion as the research arm imputed the net effect of lower Loders contribution offset by the subsequent associate contribution and lower net interest cost.

The research arm imputed the one-off disposal gains of RM2.5 billion into its net profit estimates as well.

All in, Kenanga Research maintained ‘outperform’ with a lower target price of RM5.10 per share, from RM5.25 per share previously, after accounting for lower current year 2018 estimate (CY18E) earnings per share (EPS) of 19.7 sen (from 20.3 sen).

On the other hand, MIDF Research upgraded IOI to ‘buy’ with a higher target price of RM5.27 per share.

MIDF Research increased its target price to RM5.27 per share, from RM4.95 per share previously, after increasing its Forward price earnings (PE) to 26.3-fold (from 24.7-fold).

The research arm’s valuation has been upgraded to +1.0 standard deviation (SD) valuation, from +0.5SD valuation, due to the near term dividend of 13 sen and substantial improvement in balance sheet after the 70 per cent stake sale in Loders.

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