KUALA LUMPUR: CIMB Equities Research is positive on IOI Corporation Bhd ’s sale of its 70% stake in specialty oils and fats manufacturing arm Loders Croklaan Group BV for nearly RM4bil.
The research house said on Wednesday the sale of the stake to global agribusiness and food company Bunge Ltd would allow IOI to unlock the value of its investment at attractive valuations.
“We estimate the selling price values Loders at FY16 price-to-earnings (P/E) of 34 times and FY16 enterprise value/earnings before interest, tax, 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).
“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,” it said.
CIMB Research also said IOI intends to pay out a cash dividend of RM788mil (or 13 sen a share) from the proceeds.
There is potential upside to Loders’s earnings if some of the €80m in cost synergies that Bunge has identified, flow to Loders earnings.
On Tuesday IOI Corp has entered into a definitive agreement to sell 70% of its interest in IOI Loders Croklaan BV (post internal restructuring) to Bunge for US$595mil plus €297mil cash.
The indicative price after imputing the indicative adjustment of €22.5mil is RM3.94bil (€773mil). IOI will retain a 30% stake in IOI Loders following the divestment.
CIMB Research said 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.
To recap, IOI bought this business from Unilever in November 2002 for €217mil (RM814mil). Since then, Loders has grown from three to seven processing plants and earnings have quadrupled.
“We estimate that Loders contributed around 17% of IOI’s FY6/16 net profit,” it said.
IOI plans to use 50% of the total proceeds of around RM3.94bil from the disposal to repay borrowings, 29.75% for future investment opportunities, and 20% as dividends to shareholders.
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 EGM.
IOI Corp could book a one-off gain of RM2.5bil (or 39.8 sen a share) from the disposal. This represents upside of 221% to CIMB Research’s FY6/19 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 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%.
“We maintain our EPS estimates for IOI Corp pending the completion of the disposal.
“However, we are raising our sum-of-part value to input the higher market valuations for Loders and reducing the valuations for its other downstream assets (refining and oleo) to 1.8 times price to book value.
“Maintain Hold as we see share price support from its rich assets and share buyback exercise. Key upside/downside risks are higher/lower crude palm oil prices and output,” said CIMB Research.