The IOI Group is poised to become the largest producer of vegetable oil-based fatty acids in the world.
"This will give them tremendous pricing power in the edible oils market," says a foreign analyst. "When you have that kind of status, multinational companies will approach you because you are the biggest player in their market. This just pushes them into a whole different league."
Last Thursday, IOI announced that it is acquiring India-based Birla group's Pan Century Edible Oils Sdn Bhd and Pan Century Oleochemicals Sdn Bhd for RM423 million. With this acquisition, IOI will double its existing splitting capacity to 700,000 metric tons.
"This is something that IOI has tried to do for the country," group chairman and patriarch Tan Sri Lee Shin Cheng tells The Edge.
This announcement came just a week after Malaysia announced the creation of what will become the world's largest plantation company following the merger of Sime Darby Bhd, Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd.
"Together, the two announcements put Malaysia on the map in a way we never have been before, even though we had all the right ingredients. Now, we are using these ingredients to create something that everybody will want a bite of," an analyst comments.
For IOI, the proposed Pan Century acquisitions are positive in more ways than the immediately obvious. For instance, an analyst says the Pan Century group has over RM100 million in tax credits. This means that for a specific duration, the effective contribution to tax for the two companies will be less than the current corporate tax rate of 26%.
"This is something that is not obvious but will go straight to the bottom line," the analyst says.
Another plus is the fact that IOI has been trying to increase its oleochemical capacity for over two years now, but was unable to find anything meaningful of good value. "This was a great chance and it fits in neatly with existing operations because the Pan Century plants are neighbours to IOI's facility in Pasir Gudang," the foreign analyst says.
Another analyst notes that at RM423 million, and considering Pan Century's profit after tax as at September 2005, the two companies are priced at a collective price-to-earnings ratio (PER) of about 12 times.
"IOI itself, at RM18.80 a share, is trading at a historical PER of 26 times. But then of course with IOI, you are paying for the whole story — what the group stands for, its sterling management credentials, its foresight, its efficiency, everything," the analyst says.
There is also little doubt in the minds of analysts that the two Pan Century companies will be turned into far more profitable ventures within a couple of years.
For its financial year ended Sept 30, 2005, Pan Century Edible Oils posted a profit after tax of RM20.121 million on revenue of RM1.57 billion. Pan Century Oleochemicals, meanwhile, posted a profit after tax of RM15.52 million on turnover of RM285.55 million.
Comparatively, according to a statement issued by IOI last Thursday evening, its manufacturing businesses reported operating profits of RM92 million for the quarter ended September 2006, which is more than double the operating profits of RM28 million for the previous corresponding quarter.
This is a far cry from the less-than-attractive oleochemical manufacturer Palmco Holdings Bhd, which IOI took over back in 1997.
It acquired a 32.96% in Palmco at RM4.35 per share in 1997 before the onset of the Asian financial crisis. The company was a loss maker at the time of the takeover and Lee, according to legend, swept in and cleaned up.
By its financial year ended June 1999, net profit was RM28.3 million. The next year, it had leapt to RM72 million. By FY2005, Palmco, by then reborn as IOI Oleochemicals Bhd, had posted a net profit of RM136.18 million. IOI Oleo was taken private soon after.
The Pan Century group owns the largest single-location vertically integrated palm oil refinery and oleochemicals complex in the world, with installed refinery capacity of one million tonnes a year.
According to IOI's statement, the production capacities of the Pan Century plants were expanded recently, which means that IOI will not have to cough up additional capital expenditure to increase capacity — at least for the near term.
One possible negative of the deal could be the fact that IOI will now become a net buyer of crude palm oil. With CPO closing at RM1,830 per tonne last Thursday, being a net buyer may not be a grand idea. However, those familiar with IOI say this may not be such an issue because the group has tied in its supplies for the future.
"Anyway, the margins in refining move in tandem with CPO prices, although the margins in oleochemicals and biodiesel move the other way," says a noted plantation analyst.