‘Demerger of property unit a boon for IOI Corp’

KUALA LUMPUR: Six months after the completion of the demerger of IOI Corp Bhd’s property business, its shareholders are still enjoying the benefits of the corporate exercise.

“Despite having lower earnings due to the loss of property income upon the demerger, cash flow has improved significantly as it no longer needs to consistently allocate capex (capital expenditure) to its property division,” Kenanga Research senior research analyst Alan Lim Seong Chun told The Edge Financial Daily.

Consequently, IOI Corp announced a higher dividend payout. On July 1, it declared a second interim dividend of 120% or 12 sen per share. With the first eight sen per share interim dividend announced on Feb 25, this brings the total dividends for the year to 20 sen.

IOI Corp’s share price increased 22.4% to RM5.14 last Friday from RM4.20 on Jan 15, the day its demerged property business, IOI Properties Group Bhd, made its initial public offering debut.

However, Moody’s Investors Service is concerned about the distribution as its credit metrics are “already challenged” following the acquisition of Unico-Desa Plantations Bhd in November 2013.

“While we expected FY14 (financial year 2014 ended June 30) to be a year of transition and for IOI’s credit profile to weaken, the pressure on leverage has been aggravated by management actions”, Moody’s vice-president and senior credit officer Alan Greene said in a statement last Thursday.

It said the performance of IOI Corp’s retained businesses in FY14 seems to have a “limited relationship” with the company’s bulk of debt and its shareholder-friendly distribution during the year.

“The group’s net debt as at March 31, 2014 was some RM1.8 billion larger than suggested by the pro forma numbers presented when the property hive-off was announced.

“As a result, credit metrics are unlikely to be restored to a level appropriate to the rating until the financial year ending June 2016 at the earliest,” said Moody’s.

Kenanga Research’s Lim feels that IOI Corp’s bond credit-worthiness is not a major issue given its strong cash flow from its plantation business.

“IOI Corp should be able to serve its interest payments and repay its debts on time, even with the higher dividends,” he said, adding that a near-term catalyst should result from the dividend, which has been a positive surprise.

“We expect next quarter results to be good with an estimated core net profit growth of 14% to RM1.46 billion,” he said.

According to Bloomberg data, Kenanga Research has a “buy” call on IOI Corp while Maybank IB Research has a “sell” call. Six other research houses which also cover the stock have either a “neutral” or “hold” call.

To JF Apex Securities Bhd, IOI Corp is unlikely to see exciting earnings’ growth in the near term as it is hampered by its relatively mature plantation acreage.

“Earnings of other planters will increase [overall] but IOI Corp’s momentum will be slower compared to plantation companies with younger trees like TSH Resources Bhd,” said JF Apex research analyst Jessica Low Jze Tieng.

The research house also said IOI Corp’s nine-month (9MFY14) core net profit of RM990 million was below expectations because of the higher operating cost and lower margin from its downstream business.

“While we like its status as a pure upstream player after the demerger of its property division, we reckon that the high replanting cost would continue to weigh on the group’s earnings.

“We expect the group’s downstream business to be challenging going forward, following the recovery of feedstock price,” it said in a report.

IOI Corp’s net profit jumped 283% to RM2.18 billion in the third quarter ended March 31, 2014, from RM567.8 million in the previous corresponding quarter. Revenue was 0.9% higher at RM2.9 billion.

M&A Securities, which recently initiated coverage of IOI Corp, said the company remains an efficient plantation player despite its unattractive tree age profile and losing income from the property division after the demerger.

“We foresee IOI Corp still being one of the most efficient and respected integrated palm oil players in Malaysia and loved by investors, given its deep liquidity and big market cap,” it said.

It added that IOI Corp has one of the highest fresh fruit bunch yields among the stocks under its coverage, with 24.46 million tonnes against its peers and industry’s 19 million tonnes.

This article first appeared in The Edge Financial Daily, on July 16, 2014.