IOI’s dividend attraction
Group to distribute 20% of sale proceeds to shareholders
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.