Wednesday, October 26, 2011

IOI Corporation: Terminates RM830 Millions Land Deal

October 27, 2011
Price Target: RM4.57
Share Price: RM5.10

# IOI issued a notice to Pertama Land & Development Sdn Bhd (a unit of DutaLand Bhd) to terminate the sale and purchase agreement (SPA) to acquire 11,977.9ha of oil palm plantation land in Sabah for RM830m, due to “noncompliance of certain terms and conditions which had been communicated to Pertama Land”.

# According to IOI’s announcement, OSK Trustees Bhd (the stakeholder of DutaLand Bhd) will have to refund IOI the RM83m deposit (10% of the purchase price) and interest accrued.

# However, DutaLand, on the other hand, said it does not accept IOI’s reasons for termination of the SPA, and it has notified OSK Trustees not to remit the deposit paid by IOI.

# Recall, IOI had on 28 Jul 11 proposed to acquire 11,977.9ha of oil palm plantation land (consisting of 5 estates that are planted with oil palm) in Labuk and Sugut, Sabah for RM830m.

Financial impact
Worst case scenario, assuming IOI’s 10% down payment is not refundable, it would reduce IOI’s FY06/12 net profit by 3.5% to RM2,285.8m. However, it is still premature to determine if IOI will lose its deposit given the absence of further details in the announcement.

Pros / Cons
# We are slightly negative on the latest development, as we had earlier expected the acquisition to improve IOI’s FFB yield and output growth over the longer term.

# Also, we note that this is the second time IOI walking away from such deal (first time being IOI aborted plan to acquire Menara Citibank in Nov 2008) and this may hurt its share price sentiment arising from the potential loss of deposit.

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 developments 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.

Target Price (based on SOP) maintained at RM4.57 for now, and our Hold recommendation for IOI maintained.

Source: HLIB Research

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