IOI Corp.: Between the larger caps; IOI likely to outperform Sime

Mature plantations but efficient; long-term growth from Indonesia. Its mature estates mean that IOI’s CPO volume growth of 3-4% pa from FY10E will lag its peers. But IOI is the most efficient player with the lowest production cost. Its expansion into Indonesia the past 12 months, which will raise its effective land-bank by 77,000ha (52% of Malaysia's planted land-bank), is also expected to start to contribute by 2011/12.

Singapore property asset write-down if any, priced-in. Market price for IOI’s Sentosa Cove condo projects is currently below its break-even levels. We believe asset write-downs, if any from here, estimated at M$641MM (M$0.10/share) are priced-in. In the mid-to-long term, an improved economy and completion of the Singapore IR should enable launch of the projects at better prices to generate cash flows. At market prices, the projects would fetch GDV of M$2.4B versus construction cost of M$0.8B (land cost of M$1.9B has already been sunk in).

Proposed rights issue improves finances with minimal dilution. IOI’s finances have improved with the stronger ringgit and falling net gearing levels since Mar-09. The recent proposed M$1.2B rights issue will further reduce FY10E net gearing from 25% to 11%, and result in minimal EPS dilution of 2% if treasury shares are also cancelled. This, we believe, will provide greater flexibility in ROE management and/or acquisitions.

Upgrade to Neutral. We raise our Jun-10 PT from M$4.10 to M$5.00 on a 20% premium to SOTP to build in liquidity and weather risk premium from El Nino. IOI has under-performed Sime, and with its stronger management is likely the preferred stock when foreign funds return. IOI's premium valuations to peers are at historical mean, and the return to peak levels will likely occur upon fresh ROE management efforts, and improving returns with price recovery for its Sentosa Cove projects, in our view. We thus upgrade to Neutral.