KENANGA : IOI Corp - BUY - 21 Mar 2008

IOI Corporation – Expanding closer to home (Company Update)



Price: RM6.75

Target Price: RM8.45

Recommendation: BUY



· Entirely cash financed. On 18 March 2008, IOI Corporation announced that it entered into conditional share sale agreements with Double Dynasty Sdn Bhd and Nirwana Muhibbah Sdn Bhd to acquire an effective 65% shareholding in 7 Sarawak plantation companies for RM439.9m in cash. The list of companies is detailed overleaf.

· Plantation land bank largely unplanted/ immature. The purchase consideration encompasses 30,850ha unplanted area, 13,500ha planted area, of which 4,500ha mature, and a 60MT/hour palm oil mill. This exercise will increase IOI Corporation’s overall plantation land bank (incl. Indonesia) to 365,800ha.

· Value deal nonetheless. We calculate that the purchase consideration of RM439.9m is at 10% discount to its RNAV (assume market value of RM50,000/ha for planted area, RM1,500/ha for unplanted area and RM30.0m for the 60MT/hour palm oil mill. Calculations detailed overleaf.

· 10% of the purchase consideration or RM44.0m will be paid on completion of S&P and the balance 90% or RM395.9m will be settled on completion date which is expected to be in 2QCY08. In addition, IOI Corporation will pay Double Dynasty and Nirwana Muhibbah, the net debt owing to them by the 7 Sarawak plantation companies of RM33.7m.

· The 9,000ha immature planted area will mature progressively. We assume mature area growth of 3,000ha p.a., average FFB yields of 18MT/ha as the newly matured oil palms will dilute average FFB yields and average direct CPO cost of RM800/MT. Like the rest of IOI Corporation, we assume average CPO selling price of RM3,100/MT for FY09 and FY10.

· Immediate impact to earnings estimates immaterial. As the plantation land bank of the 7 Sarawak plantation companies is largely unplanted/ immature, we are upgrading our earnings estimate by only RM17.5m for FY09 and RM32.6m for FY10 or approximately 1% p.a.

· Acquisition spree unlikely to have ended though. After raising US$600m (RM2.0b) in exchangeable bonds on 10 January 2008, we estimate that IOI Corporation’s cash and bank balance has exceeded the RM4.0b level. This exercise will utilise slightly more than 10% of its cash and bank balance.

· Maintain RM8.45 target price based on an unchanged 20x FY09E PER but upgrade call from HOLD to BUY for 25% upside potential. Not only do we like IOI Corporation for its top notch operational efficiency but also for re-rating catalysts in potential mergers and acquisitions.









KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department