IOI’s div­i­dend at­trac­tion

Group to dis­trib­ute 20% of sale pro­ceeds to share­hold­ers

The Star Malaysia - StarBiz - - News - By CE­CILIA KOK ce­cil­i­a_kok@thes­tar.com.my

PETALING JAYA: An im­pend­ing spe­cial div­i­dend is draw­ing in­vestor in­ter­est to IOI Corp Bhd, whose prospects are seen im­prov­ing along with the cur­rent strength­en­ing crude palm oil (CPO) prices.

It is es­ti­mated that the plan­ta­tion gi­ant would dis­trib­ute a spe­cial div­i­dend of 13 sen per share upon com­ple­tion of the pro­posed sale of its 70% stake in IOI Loders Croklaan Group BV.

Shares of IOI yes­ter­day closed nine sen, or 2%, higher at RM4.64, off an in­tra-day high of RM4.75 on a vol­ume of 17.6 mil­lion shares.

IOI on Tues­day an­nounced that it had en­tered into a de­fin­i­tive sale and pur­chase agree­ment with United States-listed Bunge Ltd to sell a 70% stake in Loders and its re­lated busi­nesses for a to­tal cash con­sid­er­a­tion of RM3.94bil. IOI will re­tain a 30% stake in Loders.

The deal is ex­pected to re­sult in a gain on dis­posal of RM2.5bil for IOI.

The group said it would dis­trib­ute 20% of the RM3.94bil sale pro­ceeds as spe­cial div­i­dends to its share­hold­ers. The amount would trans­late into a div­i­dend per share of around 13 sen and a yield of 2.9%.

The re­main­der of the dis­posal pro­ceeds would be used to pare down debts (50%) and fi­nance work­ing cap­i­tal or fu­ture in­vest­ment op­por­tu­ni­ties (30%).

Most an­a­lysts view the pro­posed deal, which is ex­pected to be com­pleted by the fourth quar­ter of 2018, as a pos­i­tive de­vel­op­ment for IOI.

Ac­cord­ing to CIMB Re­search, the deal would not only al­low IOI to un­lock value of its in­vest­ment in Loder at at­trac­tive val­u­a­tions, but would also re­duce the com­pany’s gear­ing.

“We es­ti­mate the sell­ing price val­ues Loders at the 2016 price earn­ings of 34 times and an EV/ EBITDA (en­ter­prise value/earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion) of 13 times, which is at the top end of com­pa­ra­ble firms’ EV/EBITDA range of 6.48 to 13.31 times,” the bro­ker­age wrote in its re­port.

“It will also cut IOI’s gear­ing from 0.76 times to 0.34 times, as IOI plans to utilise 50% of the pro­ceeds to re­pay bor­row­ings,” it said.

In ad­di­tion, CIMB Re­search noted that there was po­ten­tial up­side to Loders’ earn­ings if some of the €

80mil (RM402.6mil) in cost syn­er­gies that Bunge had iden­ti­fied flow to Loders’ earn­ings.

“Post-dis­posal, IOI will cease to con­sol­i­date earn­ings from Loders and only book in 30% of Loders’ earn­ings as as­so­ci­ates. How­ever, the lower earn­ings con­tri­bu­tion from Loders will be mostly off­set by in­ter­est sav­ings from the re­pay­ment of debts and po­ten­tial syn­er­gies fol­low­ing the sale,” CIMB Re­search said.

It es­ti­mated the po­ten­tial di­lu­tion im­pact on earn­ings from the sale to be around 2%.

CIMB Re­search has main­tained its “hold” rat­ing on IOI, cit­ing share price sup­port from the lat­ter’s rich as­sets and share buy­back ex­er­cise. The bro­ker­age has raised its tar­get price for IOI to RM4.74 from RM4.49 pre­vi­ously to re­flect the rel­a­tively high val­u­a­tion for Loders.

Sim­i­larly, Pub­lic In­vest­ment Bank Re­search (PIB) has also main­tained its “neu­tral” stance on IOI, while rais­ing its tar­get price for the counter to RM4.64 (from RM4.60 pre­vi­ously) af­ter tak­ing into con­sid­er­a­tion the im­pact of lower net bor­row­ings from the deal.

PIB said the pro­posed sale of IOI’s stake in Loders is to re­sult in in­ter­est sav­ings of about RM58.3mil per an­num.

“We think it is a good of­fer for IOI and it can re­fo­cus its at­ten­tion on its ex­ist­ing re­fin­ing and oleo­chem­i­cal busi­nesses while look­ing for new op­por­tu­ni­ties,” PIB said in its re­port.

It ex­pects the earn­ings im­pact from the stake sale on IOI to be min­i­mal.

Hong Leong In­vest­ment Bank (HLIB) shared the sen­ti­ment. It said: “Dis­posal and reval­u­a­tion gain aside, we ex­pect min­i­mal im­pact on IOI’s earn­ings, given the loss of earn­ings con­tri­bu­tion (from Loders) will likely be partly off­set by a lower in­ter­est ex­pense and IOI’s large earn­ings base.”

HLIB noted that Loders and the re­lated busi­nesses con­trib­uted to about 18% of IOI’s re­ported earn­ings for the fi­nan­cial year ended June 30, 2017.

The in­vest­ment bank has raised its tar­get price for IOI to RM4.76 (from RM4.38 pre­vi­ously) to re­flect the ex­pected dis­posal pro­ceeds and loss of in­come from Loders and its re­lated busi­nesses. It has main­tained its “hold” call on IOI as val­u­a­tion re­mains stretched.

Mean­while, TA Re­search said the en­try of Bunge would en­able Loders to ven­ture into new mar­kets such as Latin Amer­ica and In­dia, and en­able Loders to pro­vide a com­pre­hen­sive cus­tomer of­fer­ing, in­clud­ing seed oil-based prod­ucts.

“More im­por­tantly, the sale of the stake will also help IOI ease the for­eign-ex­change ex­po­sure stem­ming from the US dol­lar and en­able the group to ex­pand fur­ther into the up­stream busi­ness,” the bro­ker­age said.

“Be­sides, IOI will con­tinue to be a ma­jor sup­plier of palm oil and palm prod­ucts to Loders,” it added.

TA Re­search has main­tained its “sell” call on IOI with an un­changed tar­get price of RM4.14 per share based on 19.8 times its 2018 price earn­ings ra­tio.

The bench­mark CPO fu­tures for third-month de­liv­ery yes­ter­day hov­ered around RM2,850 per tonne, up al­most 17% from the last three months. Most an­a­lysts, how­ever, do not ex­pect the up­ward trend in CPO prices to con­tinue due to high in­ven­to­ries and soft de­mand.

For in­stance, PIB ex­pects CPO prices to fall be­low RM2,500 per tonne over the next few months.

CIMB Re­search ex­pects CPO prices to av­er­age at RM2,600 per tonne this year, while HLIB ex­pects the 2017 av­er­age to be RM2,700 per tonne be­fore fall­ing to an av­er­age of RM2,500 per tonne next year.

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