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).

STOCK FOCUS OF THE DAY: IOI BUY

STOCK FOCUS OF THE DAY
IOI Corporation : Selling at spot prices BUY

Maintain BUY on IOI Corp (IOI) with lower fair value of RM5.20/share. We have revised our FY09F-FY10F earnings forecasts for IOI downwards by 1% to 2% to account for lower manufacturing profits, after our recent discussion with management. IOI’s oleochemical division is currently facing declining sales margins and volume as the economic slowdown takes its toll on demand for beauty, personal care and cosmetic products. Despite the plunge in crude palm oil (CPO) prices recently, IOI is still positive on prices. We understand that demand for palm oil is stable. Due to IOI’s favourable view on CPO prices, the group is currently selling at spot prices. There are currently mixed views about weather conditions. Operating costs are expected to be either flat or slightly higher than last year. It could range between RM1,100/tonne to RM1,200/tonne in FY09F (FY08: RM1,098/tonne). Although cost of fertiliser has declined compared to last year, other components such as labour and transportation costs have increased.

Others :
Banking Sector : Relaxation in NPL classification will not distort industry data OVERWEIGHT

QUICK TAKES
Indofood Agri : Mulling issuance of Rp1 trillion bonds BUY
AirAsia : Extending out gearing upcyle in growth phase BUY
Rubber Glove Sector : Longer delivery time from shortage of labour OVERWEIGHT

NEWS HIGHLIGHTS
Proton Holdings : Proton plans to tap high-growth regional markets
Financial Services : Kenanga to sell stake in Dubai advisory
Oil & Gas Sector : LNG exports slump, gas demand down / Merapoh’s US$10bil refinery may get 50% funding from foreign banks

IOIC - BUY - 16 May 2008

IOI Corp - 9MFY08 results largely in-line (Results Note)



Price: RM7.50

Target Price: RM8.45

Recommendation: BUY



· Largely expected. 9MFY08 core net profit of RM1,407.6m (ex-RM226.8m translation gain on US$ denominated borrowings) was largely in-line with expectations, comprising 68% of our earnings estimate of RM2,080.3m. We expect higher CPO prices and seasonally higher FFB production in 4QFY08 to easily makeup for the remainder.

· 9MFY08 net profit of RM1,634.3m was 59% higher YoY due to higher average CPO price realised of RM2,705/MT for 9MFY08 or 64% higher YoY compared to RM1,649/MT for 9MFY07. While 9MFY08 plantation segment operating profit almost doubled YoY to RM1,302.4m, all other segments recorded YoY improvement in earnings contribution.

· Although 3QFY08 FFB production of 848,455MT was 23% lower QoQ, 3QFY08 net profit of RM601.6m was 4% higher QoQ as average CPO price realised of RM2,971/MT was 11% higher QoQ and the resource based manufacturing segment continued to do well due to raw material feedstock costs locked in at lower prices, yielding higher margins.

· Resource-based manufacturing continues to shine. At this segment, 9MFY08 earnings contribution of RM457.4m was 47% higher YoY due to full year contributions from the Pan Century Group that was acquired in 3QFY07 and higher refining and oleo-chemical margins due to raw material feedstock costs locked in at lower prices and increased volumes.

· No revision in earnings estimates. CPO prices are currently above RM3,500/MT, above our FY08 average CPO price assumption of RM2,700/MT. We continue to employ that assumption as circa 50% of FY08 CPO production was sold forward at RM2,500/MT, diluting the positive impact further appreciation in CPO prices would have on net profit. After hitting the seasonal trough in 3QFY08, FFB production should recover in 4QFY08. We believe our FY08 estimates will be met.

· Maintain RM8.45 target price based on an unchanged 20x FY09E PER and BUY call. We believe that downside risk is limited and there are re-rating catalysts in higher CPO prices (current CPO price of RM3,500/MT already higher than FY09 average CPO price assumption of RM3,100/MT) and M&As (US$600m in exchangeable bonds raised on 9 January 2008).

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