IOI Corporation: SELL TP RM4.10

Of Rights and Results


· Following the rights issue trend
IOI yesterday announced a rights issue of 1rights:15shares priced at
RM2.90 (38.3% discount to theoretical ex-rights price of RM4.70) per
rights that if fully taken up, would raise cash of RM1.22bn. The group
plans to use the funds for capex as well as to pare down borrowings.
While they have yet to give the exact utilisation of proceeds, we expect
that at least 50% would go into paring down debts while the remainder to
satisfy planting capex in Indonesia and expansion of their refinery in
Rotterdam. The full issue of shares would cause EPS dilution of 6.67%.
Assuming the group pares down its debts by RM700m, interest savings
would be in the region of RM30m only which is negligible to bottom line.
Net gearing would improve to 14% from 22% expected in FY10. We view
the rights as cheap entry for shareholders into more IOI shares.

· 4Q likely to be soft
IOI has during 9MFY09, achieved a CPO price average of RM2,932 which
has strongly exceeded the MPOB price average of RM2,316. While as of
9MFY09, results still came in within our expectations but we believe that
4Q will prove a softer showing for the Group. MPOB prices have averaged
at RM2,416 for 2QCY09 and we expect that the group would report
numbers closer to this average as the bulk of forward sales would have
been exhausted over 4Q. Hence, we adjust down our FY09 expectations
by 13% to reflect a softer 4Q. To note, our price average for the year is
RM2800 for IOI. We are also adjusting down FY10 (-26%) and FY11 (-
22%) numbers to reflect higher operating cost of RM1050 per MT (RM950
previously) and flattish FFB production growth from existing hectarage.

· Shifting to PE valuation, Maintain Sell
In a volatile market and with equally volatile CPO prices, we see trading
opportunities aplenty for a liquid stock like IOI but at these levels, we view
valuations to be stretched. Looking at PE Band charts of IOI, we note that
since early 2006, the company has been gyrating between the 20-25x
bands and now still trades below those levels. However we do not see
those levels achievable now given the lack of real fundamental drivers for
CPO price to exceed RM3000 again. As such, we peg the group’s FY10
EPS to their average PE of 18x (the average since Jan 2006) and derive a
value of RM4.10 (Previous DCF target RM4.00).