ECM Libra Research has maintained its sell recommendation on IOI CORPORATION BHD
[ IOICORP 4.870 -0.030 (-0.612%) ] at RM4.98, with a target price of RM4.10.
It said that in a volatile market and with equally volatile crude palm oil (CPO) prices, trading opportunities were aplenty for a liquid stock like IOI Corp, but at current levels valuations were stretched.
In looking at price earnings (PE) band charts of IOI Corp, ECM Libra noted that since early 2006, the company had been gyrating between the 20 times and 25 times band and now still trades below those levels.
“However, we do not see those levels achievable now given the lack of real fundamental drivers for CPO price to exceed RM3,000 again.
“As such, we peg the group’s FY10 earnings per share (EPS) to their average PE of 18 times (the average since Jan 2006) and derive a value of RM4.10 (previous discounted cash flow target RM4),” it said.
The research house noted that IOI Corp’s proposed rights issue of one rights per 15  shares priced at RM2.90 (38.3% discount to theoretical ex-rights price of RM4.70) per rights would raise cash of RM1.22 billion if fully taken up.
IOI Corp plans to use the funds for capital expenditure (capex) as well as to pare down borrowings.
“While they have yet to give the exact utilisation of proceeds, we expect that at least 50% would go into paring down debts while the remainder to satisfy planting capex in Indonesia and expansion of their refinery in Rotterdam.
“The full issue of shares would cause EPS dilution of 6.67%. Assuming the group pares down its debts by RM700 million, interest savings would be in the region of RM30 million only which is negligible to its bottom line,” said ECM Libra, adding that net gearing would improve to 14% from 22% expected in FY10.
“We view the rights as a cheap entry for shareholders into more IOI shares,” added the research house.
ECM Libra noted that IOI Corp had during 9MFY09, achieved a CPO price average of RM2,932 which had strongly exceeded the Malaysian Palm Oil Board (MPOB) price average of RM2,316.
“While as of 9MFY09, results still came in within our expectations but we believe that 4Q will prove a softer showing for the group.
“MPOB prices have averaged at RM2,416 for 2QCY09 and we expect that the group would report numbers closer to this average as the bulk of forward sales would have been exhausted over 4Q,” it said.
ECM Libra said it has adjusted down its FY09 expectations by 13% to reflect a softer 4Q. “To note, our price average for the year is RM2,800 for IOI Corp.
“We are also adjusting down FY10 (-26%) and FY11 (-22%) numbers to reflect higher operating cost of RM1,050 per tonne (RM950 previously) and flattish FFB (fresh fruit bunches) production growth from existing hectarage,” it said.
IOI Corp fell 12 sen to close at RM4.86 last Friday.
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