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‘IOI’s property spin-off beneficial in the long run’

KUALA LUMPUR: IOI Corp Bhd’s plan to spin off its property business will weaken its credit profile in the short term, but should prove beneficial in the long run, said Moody’s Investors Service.

“With the demerger, IOI will have lower earnings and a smaller asset base, as well as reduced income diversity,” said Moody’s vice-president and senior credit officer Alan Greene in a statement.

He said the impact has already been factored into Moody’s Baa2 stable rating.

“The demerger will be beneficial in the long term because IOI will be able to focus on growing its plantations and resource-based manufacturing divisions, which are highly cash generative,” he explained.

Greene was referring to the release of a Moody’s report titled “IOI Corp: Frequently Asked Questions on the Demerger of Its Property Business”, which was co-authored with Moody’s associate analyst Dylan Yeo.

Moody’s expects the company to be more cash generative.

It highlighted that the group would see recurring income from the plantations and resource manufacturing divisions, which will no longer be used to fund large-scale property developments.

Yeo is of the view that the demerger would place greater emphasis on IOI’s liquidity position.

“This is because cash on hand will become more important as IOI’s operating margin will see a greater correlation with crude palm oil (CPO) prices after the loss of the property segment,” he said.

Moody’s notes that excessive shareholder returns or overly aggressive growth plans may pressure IOI’s ratings.

It pointed out that a further sizeable acquisition in the next 12 months may reduce IOI’s cash position, and could result in net debt or Ebitda rising above Moody’s downward rating parameter of 1.5 times.

In May, IOI announced a plan to spin off its property division into a separate company, IOI Properties Group Bhd, which will be listed on Bursa Malaysia.

Creditors and shareholders have approved the transaction. Moody’s expects it to be completed in January 2014 after regulatory approvals.

The proposed transaction will see IOI divest most of its property interests. In return, it will receive cash proceeds of about RM1.9 billion, plus cash settlement of intercompany balances with the property division.

For IOI Corp’s financial year ended June 30, 2013 (FY13), its property division contributed 33% of total profit compared with FY12’s of 26%.

The property division was the second largest contributor to the group with RM863. 1 million in FY13, while its plantation segment is the main contributor generating about RM1.1 billion.

The exercise also involves a reduction in assets for IOI of RM11.2 billion and a decrease in debt of RM500 million, out of total group debt of RM7.8 billion, Moody’s noted.

A payment of RM2 billion from the restricted offer for sale of the property division’s equity is said to be received by the legacy IOI business.

 

This article first appeared in The Edge Financial Daily, on November 12, 2013.

 

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