Tuesday, July 30, 2013

IOI Corporation : Demerger excitement (CS)

IOI Corporation
Maintain UNDERPERFORM
Price (25 Jul 13 , RM) 5.45
TP (prev. TP RM) 5.00 (4.60)
Demerger excitement

● We have revised up IOI’s FY13 and FY14 earnings forecasts by 10% and 5%, respectively, as its manufacturing and property divisions have beaten our expectations. We have revised up the target price of IOI to RM5.00, from RM4.60.

● IOI’s immature plantations account for only 12% of its total planted area vs. 35% for Genting Plantations and 20% for KLKepong.


● IOI Corp will demerge its plantation and property assets. The property SPV will own an undeveloped land bank of about 10,175 acres in Malaysia, China and Singapore, with a GDV of some RM16 bn to be developed over the next three years. Management expects an operating profit of at least RM1 bn, half from overseas and half from Malaysia.

● Although the market could be excited about the demerger, we believe the good news is already in the share price. We maintain our UNDERPERFORM, as: (1) IOI Corp trades at prospective FY13 and FY14 P/Es of 21x and 20x, respectively, which appear fully valued. (2) it has minimal organic growth potential.

Prospects for palm oil remain bearish
In our new report entitled Are we there yet? No, dated 29 July, we maintain that palm oil prices will be under downward pressure for the remainder of 2013, because:
(1) We expect weaker demand over the next few months from China and India where edible oil inventories remain relatively high YoY.
(2) Palm-biodiesel’s price advantage has diminished, because palm oil prices are almost at par with crude oil prices.
(3) The palm oil-soyoil price gap has narrowed to US$160 per tonne now vs US$400 in December 2012—this is no longer a catalyst for demand.
(4) We expect a bumper soybean crop in the US, a sharp rebound from the drought-ravaged crop in 2012. So far, soy crop conditions remain good in the US.
(5) Palm oil production rises seasonally in 2H (potentially peaking in November) and inventories traditionally rise in a high production period.

IOI Corp–Demerger excitement
Cut profit estimates. Although we have cut our palm oil price assumptions to RM2,300 for 2013 (from RM2,600) and RM2,600 for 2014 (from RM2,800), we have revised up IOI’s FY13 and FY14 earnings forecasts by 10% and 5%, respectively, as its manufacturing and property divisions have beaten our expectations. We have revised up the target price of IOI to RM5.00 from RM4.60.

Relatively old. IOI’s immature plantations account for only 12% of its total planted area vs. 35% for GENP and 20% for KLK.
Demerger excitement looks fully priced in. IOI Corp will demerge its plantation and property assets. A newly created SPV will buy over the property assets from IOI Corp for RM14,671 mn, via the issuance of 3,287 mn new SPV shares. Two thirds of SPV’s shares will be distributed via dividend-in-specie to IOI Corp shareholders on a 1-for- 3 basis. One-third of SPV’s shares will be distributed under a restricted offer for sale (ROS) to IOI Corp’s shareholders at some 30% discount, on a 1-for-6 basis. Founder Tan Sri Lee will underwrite the restricted offer for sale. The property SPV will own an undeveloped land bank of about 10,175 acres in Malaysia, China and Singapore, involving a GDV of some RM16 bn to be developed over the next three years. Management expects to achieve an operating profit of at least RM1 bn over the next three years, half from overseas (Singapore and China) and half from Malaysia.

Valuations appear fully valued. Although the market may be excited about the demerger, we believe the good news is already in the share price. We maintain our UNDERPERFORM on IOI Corp because:
• it is trading at prospective FY13E and FY14E P/Es of 21x and 20x, respectively, which appear fully valued.
• it has minimal organic growth potential, as its immature plantations account for only 12% of the total planted area.



Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 29/07/13

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