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IOI Corp’s valuations are stretched, trading at 25 times mid-FY09 price-to-earnings (PER) ratio, and fundamental investors with long-term investment horizons should consider unwinding their positions, says Aseambankers Equity Research.
It suggested investors switch to better-valued mid-cap stocks like Asiatic Development Bhd and Tradewinds Plantation Bhd. It added that crude palm oil (CPO) prices would ultimately revert to its mean value, which should be more sustainable at RM2,200 to RM2,400 per tonne over the next two to three years.
“Nevertheless, we acknowledge that IOI could remain a favourite among other investors for trading purposes given its liquidity and proxy to further short term CPO price upward trends.
“We maintain our Fully Valued call on IOI Corp but raise our target price to RM5.80 based on 20 times FY09 EPS (earnings per share) to reflect our earnings adjustment,” it said.
Commenting on IOI Corp’s first quarter (1Q) net profit, Aseambankers Research said the RM452 million was 77% above its and consensus expectations as 1Q is usually a weaker quarter.
All businesses recorded on-year improvements in 1QFY08 as revenue and operating profit jumped to RM3.1 billion (up 64% on-year; up 23% on-quarter) and RM651 million (up 91% on-year; up 1.7% on-quarter) respectively.
Overall margins improved to 21% from 18%, mainly on higher average CPO selling prices of RM2,473 tonnes (versus RM1,483 per tonne in 1QFY07) despite flattish on-year fresh fruit bunches production growth.
Plantations contributed 61% of IOI’s earnings before interest and tax (EBIT) at RM398 million (up 136% on-year; up 54% on-month). Meanwhile, EBIT contribution from the resource-based manufacturing division continues to show improvement with contributions from newly acquired Pan Century and its refinery in Rotterdam.
“IOI is on track set to a net profit record this financial year amidst lofty palm oil prices. We understand half of IOI’s FY08 production has been locked in at RM2,500 tonne,” it said.
“We are raising our FY08-09 net profit forecast by 7.7%-8.4% respectively, factoring higher CPO price assumptions. Maintain Fully Valued with a revised target price of RM5.80 based on 20 times FY09 EPS,” it said.
On IOI’s plans to issue its third five-year exchangeable bonds (EBs) issue for up to US$600 million or RM2 billion in value, the research house said: “We believe this is positive for IOI especially since its conversion price will be referenced at a premium to IOI’s present high share price, which is trading at more than 25 times mid-FY09 PER.”
Aseambankers Research said it was an opportune time for IOI to raise “cheap” fresh capital in view of its ongoing aggressive greenfield projects and its intention to acquire more plantation companies.
It believed these “cheap” funds will help to enhance IOI’s bottom line in the future, on the premise that IOI will not overpay for new assets in view of high asking prices amidst the commodity upcycle.
“The issuance of EBs is expected to have minimal dilution impact on EPS as we anticipate the interest rate to be competitive, at less than 5%. And it will also have little impact on fully diluted EPS on conversion if the EBs are issued at a premium to the present IOI price, which is trading in excess of 25 times mid-FY09 PER,” it said.
Source here
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