Monday, April 11, 2011

IOI Corporation: To Jointly Develop South Beach Project

April 11, 2011
Price Target: RM5.90
Share Price: RM5.65

# IOI will jointly develop South Beach with CDL, through:
(1) Subscription of a 49.9% stake in Scottsdale Properties for S$114.8 million;
(2) Shareholder advance of S$27.7m to Scottsdale; and
(3) The injection of Iselin (which acquired a 33.3% stake in South Beach Consortium, SBC) into Scottsdale in consideration of a shareholder loan owing by Scottsdale to IOI Consolidated.

# Both CDL and IOI may be required to contribute, in proportion of their respective shareholdings in Scottsdale, estimated to be in the region of S$500 million each.

# All in, the acquisitions will involve a total investment cost of up to S$816.8 million (equivalent to RM1.96 billion) by IOI.

Financial impact
We believe IOI would not have issue funding the acquisition above, given its healthy balance sheet. The latest transactions will raise IOI’s net debt and net gearing to
RM3,235m and 0.29x from RM1,275m and 0.15x as at 31 December 10. Earnings wise, the transactions will reduce IOI’s FY06/12 net profit by RM88 million (or 3.3%), assuming: (1) Total investment cost of RM1.96 billion; (2) Cost of debt of 6% p.a.;
and (3) Tax rate of 25%.

Pros / Cons
Pricing wise, we believe the valuation paid by IOI is not excessive. The average acquisition price of S$144.3 million (based on the average of S$114.8 million paid for a 49.9% stake in Scottsdale and US$173.9 million paid for Elad’s 33.33% stake
in SBC) is at a 6.9% discount to the S$155 million that CDL paid for Istithmar’s 33.33% stake.

Despite the strategic location and it is likely the last major iconic site in the Civic District, we are neutral on the latest development, given the huge investment cost involved in the project (including a potential equity injection of S$500 million, or RM1.2 billion) and the Singaporean government’s measure to cool its property sector, which may in turn affect demand and hence the pricing of this development.

Downside risks –
(1) Recovery in global vegetable oil production may result in a sharp plunge in vegetable oil prices;
(2) Demand rationing by certain oil consuming countries when vegetable oil prices skyrocket to certain level; and
(3) The suspension of RSPO certification may give rise to reputation risk.

FY06/11 net profit forecasts maintained for now.

HOLD <- ->

Recent suspension of RSPO certification may give rise to reputational risk.

(1) Strong earnings outlook, given our bullish view on CPO prices and demand; and (2) Strong balance sheet.

SOP-derived TP (see Figure 3) remains unchanged (based on SOP) at RM5.90, pending further update with management.

Source: HLeBroking

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