This article first appeared in The Edge Financial Daily on September 14, 2017

IOI Corp Bhd
(Sept 13, RM4.64)
Maintain hold with a higher target price of RM4.74: IOI Corp Bhd has entered into a definitive agreement to sell 70% of its interest in IOI Loders Croklaan BV (post internal restructuring) to Bunge Ltd for US$595 million (RM2.49 billion) plus €297 million (RM1.49 billion) cash (subject to adjustments according to the agreement). The indicative price after imputing the indicative adjustment of €22.5 million is RM3.94 billion. IOI will retain a 30% stake in Loders following the divestment.

Loders is one of the leading global suppliers of specialty oils and fats to the processed food industry. It has manufacturing operations in the Netherlands, the US, Malaysia and Canada. IOI bought this business from Unilever NV in November 2002 for €217 million. Since then, Loders has grown from having three to seven processing plants and its earnings have quadrupled. We estimate that Loders contributed around 17% of IOI’s financial year 2016 (FY16) net profit.

We are positive about the deal as: i) it allows IOI to unlock the value of its investment at attractive valuations; we estimate the selling price values Loders at FY16 price-earnings ratio of 34 times and FY16 enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) of 13 times (at top end of comparable firms’ EV/EBITDA range of 6.48 times to 13.31 times); ii) it will cut IOI’s gearing from 0.76 times to 0.34 times as IOI plans to utilise 50% of the proceeds to repay borrowings; iii) IOI intends to pay out a cash dividend of RM788 million (or 13 sen per share) from the proceeds; and iv) there is potential upside to Loders’ earnings if some of the €80 million in cost synergies that Bunge has identified flow to Loders’ earnings.

The group plans to use 50% of the total proceeds of around RM3.94 billion from the disposal to repay borrowings, 29.75% for future investment opportunities, and 20% as dividends to shareholders. The remaining 0.25% or RM10 million of total proceeds has been earmarked for the expenses of the proposed disposal. The transaction is expected to be completed within the next 12 months, subject to regulatory and other customary approvals, which include the approval from IOI’s shareholders at an extraordinary general meeting.

IOI estimated that it could book a one-off gain of RM2.5 billion (or 39.8 sen per share) from the disposal. This represents an upside of 221% to our FY19 net profit estimate for IOI Corp. Post the disposal, it will cease to consolidate earnings from Loders and only book in 30% of Loders’ earnings as an associate. However, the lower earnings contribution from Loders will 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 Research, Sept 13