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IOI Corp Bhd
(Nov 5, RM4.89)
Maintain sell with target price of RM3.97:
There is a high probability that IOI Corp (IOI) could be stripped of its syariah status at the upcoming end-November 2014 review.

This is due to its smaller asset base after the demerger of its property division, which resulted in IOI potentially breaching the conventional debt-to-total assets ratio requirement (to stay below 33%).

Stripping aside unrealised foreign exchange market translation loss of RM142 million arising from its US dollar debt exposure, we expect IOI to post a core profit after taxation and minority interest of RM328 million for the first quarter of financial year 2015 (1QFY15) (down 31% year-on-year [y-o-y], down 38% quarter-on-quarter (q-o-q)), or 26% of our FY15 forecast, within our expectation.

Operationally, IOI’s 1QFY15 earnings should be driven by its still healthy upstream plantation operating profit of RM276 million (up 16% y-o-y, down 2% q-o-q). The main surprise could emanate from its resource-based division as the industry’s refining margin remained thin during the quarter while oleo-chemical prices also dipped in tandem with the lower crude oil price.

There is considerable downside risk to IOI’s current share price this end-November 2014 if IOI drops off the Hijrah Syariah and Emas Syariah indices given at least 2% of IOI share base will need to change hands within days of the review.

Even without the review, IOI is pricey at about 25 times 2015 price-to-earnings (PER) ratio. The stock lacks short-term catalysts post its demerger with IOI Properties Group Bhd. Against a smaller balance sheet with a net gearing of 59% (as at June 30 2014), a tepid projected three-year FY14 to FY17 fresh fruit bunch output compound annual growth rate of 2.4% and no property development potential to boost earnings, valuations are steep at about 25 times FY15 PER and RM154,000 enterprise value per planted hectare (vs the sector’s about RM60,000), based on our estimates.

We believe IOI will suffer some de-rating and be under strong selling pressure if its syariah status is dropped. — Maybank IB Research, Nov 5

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This article first appeared in The Edge Financial Daily, on November 6, 2014.

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