IOI Corp and Bunge in win-win deal

IOI to re­duce debts while it’s a game changer for Bunge in ed­i­ble oils

The Star Malaysia - StarBiz - - Companies & Strategies -

New in­vest­ments

Of the to­tal sales pro­ceeds from Loders’ 70% stake dis­posal, Lee tells StarBizWeek that IOI will re­serve 30% or RM1.172bil for fu­ture in­vest­ments and work­ing cap­i­tal re­quire­ment.

Of the re­main­ing pro­ceeds, 50% will be utilised for re­pay­ment of bor­row­ings, 20% div­i­dend and dis­posal ex­penses about 0.25%.

“We plan to make fur­ther new in­vest­ments in our core busi­ness ar­eas us­ing part of the pro­ceeds of the dis­posal,” says Lee, who adds that there is a pos­si­ble fu­ture in­ves­ments in plan­ta­tion.

To sup­port its growth ex­pan­sion plan, IOI Group is open to ac­quire more plan­ta­tion land in Malaysia or In­done­sia.

To date, IOI Group has about 207,000 ha plan­ta­tion land bank in Malaysia and In­done­sia with the bal­ance of up­lanted area about 9,000 ha.

The group is plan­ning to com­plete the plant­ing of re­main­ing 9,000 ha in In­done­sia over the next two to three years with a tar­geted re­plant­ing about 6,000-9,000 ha per year.

At the same time, IOI holds 31.7% stake in an as­so­ciate com­pany Bu­mi­tama Agri Ltd, which has a planted area of about 120,000 ha in In­done­sia.

Asked on the pos­si­ble fu­ture earn­ings di­lu­tion to IOI Group due to its smaller stake in Loders, Lee points out that it will de­pend on the growth of IOI group’s present plan­ta­tion and oleo­chem­i­cal busi­nesses “where there have been new plant­ings and re­cent ac­quisi- tion of new plants as well as plant ex­pan­sion re­spec­tively.”

“We are also plan­ning to make fur­ther new in­vest­ment in our core busi­ness ar­eas us­ing part to the pro­ceeds from the dis­posal,” ex­plains Lee.

The dis­posal of Loders is ex­pected to be com­pleted by the fourth quar­ter of 2018, and is not ex­pected to have any ma­te­rial im­pact on the earn­ings of the IOI group for June 30, 2017.

Mean­while, Bunge CEO Soren W. Schroder has de­scribed the part­ner­ship with IOI Loders as a “nat­u­ral match.”

The deal would be a game changer by rais­ing Bunge’s earn­ings from ed­i­ble oil blends which tend to have higher and stead­ier profit mar­gins than trad­ing bulk com­modi­ties.

Bunge last year han­dled seven mil­lion tonnes of ed­i­ble oil prod­ucts while Loders’ oil vol­ume to­talled 1.6 mil­lion tonnes.

In a re­cent an­a­lysts brief­ing in New York, he points out that Loders ac­qui­si­tion ac­cel­er­ates the growth of Bunge value-added busi­ness and is im­me­di­ately cash ac­cre­tive.

The cost syn­er­gies are sig­nif­i­cant at US$45mil per year by year three and we estimate rev­enue syn­er­gies to be about US$35mil in the near term.”

Schroder said Loders’ stand­alone earn­ings be­fore in­come, tax, de­pre­ci­a­tion and amor­ti­sa­tion (EBITDA) is pro­jected to grow at low dou­ble dig­its per year over the next three years, and when in­te­grated with Bunge will nearly dou­ble the earn­ings of the com­pany’s oils fran­chise.

“The com­bined busi­ness will fo­cus in­tensely on cus­tomer so­lu­tions and clear com­mit­ments to sus­tain­abil­ity,” he said.

In July, Bunge has iden­ti­fied growth in ed­i­ble oils as a pri­or­ity when it an­nounced a US$450mil cost-cut­ting and com­pet­i­tive­ness pro­gramme.

The com­pany en­tered into a US$900mil loan agree­ment with Su­mit­omo Mit­sui Bank­ing Cor­po­ra­tion, which it may use to fi­nance the Loders pur­chase.

Schroder said that while Bunge would bor­row to help fi­nance the ac­qui­si­tion, which is ex­pected to close in 12 months, it “will pay it­self back in rea­son­ably short or­der”.

Syn­er­gies cre­ation

Ac­cord­ing to UOBKayHian, IOI is em­u­lat­ing the syn­er­gies cre­ated from the part­ner­ship be­tween Wil­mar Group and an­other global agribusi­ness player Archer Daniels Mid­land.

By rid­ing on Bunge’s global pres­ence, Loders would be tap­ping into Bunge’s pres­ence in other re­gions such as South Amer­ica and South Asia which IOI cur­rently does not have a foot­print which will help to in­crease sales in Loders.

IOI will also be get­ting bet­ter ac­cess to the soft­oils mar­ket by part­ner­ing Bunge, says the re­search unit.

The re­search unit said in its re­port that the global de­mand for blended oils is in­creas­ing.

Thus the ex­po­sure to other soft­oil mar­kets will en­hance Loders com­pet­i­tive ad­van­tage, it added.

UOB Kay Hian also points out that post-dis­posal, IOI net gear­ing ra­tio is ex­pected to re­duce to 0.34 times from 0.78 time­sas of end-June 2017.

Par­ing down of for­eign cur­rency bor­row­ings will re­duce IOI’s ex­po­sure to US dol­lar fluc­tu­a­tion.

A po­ten­tial spe­cial div­i­dend is also in the off­ing with the IOI man­age­ment plan­ning to utilise 20% of the pro­ceeds as spe­cial div­i­dend, and this will trans­late to div­i­dend per share of 12.6 sen or yield of 2.8%.

On po­ten­tial earn­ings di­lu­tions, UOBKayHian un­der­stands that with­out the part­ner­ship with Bunge, Loders sales are ex­pected to grow at sin­gle-digit year-onyear (y-o-y) in the com­ing years.

But through the part­ner­ship, Loders sales are ex­pected to grow at dou­ble digit y-o-y, sup­ported by the cross sell­ing and ex­pan­sion to new mar­kets.

More­over, the part­ner­ship is ex­pected to cre­ate cost syn­ergy through shared in­fra­struc­ture and sup­ply-chain op­ti­mi­sa­tion. Ac­cord­ing to Bunge, the part­ner­ship could cre­ate to­tal syn­ergy of US$80mil in 2020, of which US$45mil will be in cost and US$35mil in rev­enue.

“How­ever, the dis­posal could lead to earn­ings di­lu­tion to IOI in the ear­lier years due to its smaller stake (30%) in Loders,” adds the re­search unit.

CIMB Re­search also views the dis­posal of Loders’ con­trol­ling stake to Bunge as a good deal for IOI.

IOI es­ti­mated that it could book a one-off gain of RM2.5bil or 39.8 sen per share from the dis­posal.

“This rep­re­sents up­side of 221% to our FY2016-2019 net profit es­ti­mates for IOI Corp. Post the dis­posal, it will cease to con­sol­i­date earn­ings from Loders and only book in 30% of Loders earn­ings as as­so­ciates. How­ever, the lower earn­ings con­tri­bu­tion from Loder­swill be mostly off­set by in­ter­est sav­ings from re­pay­ment of debts and po­ten­tial syn­er­gies fol­low­ing the sale.

“We estimate the po­ten­tial di­lu­tion im­pact on earn­ings from the sale to be around 2%,” CIMB adds.

The re­search unit is also main­tain­ing its earn­ings per share es­ti­mates for IOI Corp pend­ing the com­ple­tion of the dis­posal.

“How­ever, we are rais­ing our SOP value to in­put the higher mar­ket val­u­a­tions for Loder­sand re­duc­ing the val­u­a­tions for its other down­stream as­sets (re­fin­ing and oleo­chem­i­cals) to 1.8 times P/BV.

CIMB is main­tain­ing a “hold” on IOI as “we see share price sup­port from its rich as­sets and share­buy­back ex­er­cise. The key up­side or down­side risks are higher or lower crude palm oil and the out­put.”

Vi­tal role: Lee says IOI will con­tinue to play a vi­tal role in Loders post-trans­ac­tion given its ex­per­tise in palm oil sourc­ing and busi­ness ex­pe­ri­ence in the fast grow­ing Asia Pa­cific re­gion.

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