Thursday, July 28, 2011

IOI Corporation :HOLD : Acquires Land in Sabah

July 29, 2011
Price Target: RM5.41
Share Price: RM5.18

# IOI proposed to acquire 11,977.9ha of oil palm plantation land (consisting of 5 estates that are planted with oil palm) inLabuk and Sugut, Sabah for RM830m (translating to anaverage price of RM69,294/ha). The acquisition also entails buildings, fixture and fittings, and motor vehicles.

# 10,449.3ha (87.2%) of the total 11,977.9ha is planted with oil palm, whereby 8,896.3ha or 85.1% is already mature. FFB production and yield of these 5 estates has increased to 88,139.9 tonnes and 10.6 tonnes/ha in FY06/11 from 74,402 tonnes and 9.3 tonnes/ha in FY06/09.

# The latest acquisition will increase IOI’s plantation land bank by 11,977.9ha or 6.7% to 190,862ha in Malaysia.

# The acquisition is expected to complete by 2QFY06/12, and IOI intends to rehabilitate the estates upon completion of the acquisition to improve the estates’ FFB yield, given the estates low yield.

Financial impact
# It will raise IOI’s net debt and net gearing to RM2.6bn and 0.19x from RM1.8bn and 0.15x as at 31 Mar 2011.

Based on our estimates, the acquisition would enhance IOI's net profit by RM9m p.a. (or less than 1% of its total net profit) assuming:
(1) FFB yield of 10.6 tonnes/ha;
(2) CPO price of RM3,000/tonne;
(3) PK price of RM1,700/tonne;
(4) OER of 21.5% and 5% for CPO and PK; and
(5) Cost of borrowing of 5.5%.

Pros / Cons
We are positive on the latest acquisition, given:
1) The close proximity of the acquired estates to IOI’s Mayvin estates would further enhance its economies of scale and operational efficiencies; and
2) We believe IOI is able to improve the estates’ FFB yield, given its expertise and experience in oil palm plantation.

Downside risks – (1) Global vegetable oil (including CPO) production comes in higher than expected, resulting in lower-than-expected CPO prices; (2) Demand rationing by certain oil consuming countries (such as India) when vegetable oil prices skyrocket to certain level; and (3) Recent development may give rise to reputation risk.

Maintained for now, pending further update from management.

Rating - HOLD
Perception to reputational risk (arising from the RSPO suspension) that would result in valuation multiple compression.

Strong balance sheet.

TP (based on SOP) maintained at RM5.41 for now, and our Hold recommendation for IOI maintained.

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