Wednesday, November 9, 2011

IOI Corporation: Resolves Land Deal Termination Issue

November 10, 2011
Price Target: RM4.57
Share Price: RM5.17

# Both IOI and DutaLand have agreed to revoke the sale and purchase agreement (SPA) to acquire 11,977.9ha of oil palm plantation land in Sabah for RM830m.

# OSK Trustees Bhd (the stakeholder jointly appointed by both parties) will refund IOI both the deposit (RM83m, equivalent to 10% of the purchase price) together with the interest accrued.

# 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. Subsequently, IOI has on 26 Oct 2011 issued a notice to Pertama Land & Development Sdn Bhd (a unit of DutaLand Bhd) to terminate the SPA due to “noncompliance of certain terms and conditions which had been communicated to Pertama Land”.

Financial impact
None, as we did not reflect the potential interest income forgone from the potential loss of deposit (albeit immaterial, as this would only reduce IOI’s FY06/12 net profit by 0.1%). Also, we did not factor in the potential contribution from the this oil palm plantation land.

Pros / Cons
Positive, as the dispute between IOI and DutaLand has now come to an end, and IOI will not lose the 10% 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.


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

Strong balance sheet.

SOP-derived Target Price maintained at RM4.57, and our Hold recommendation for IOI maintained.

Source: HLIB Research

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