Affin IB maintaining 'reduce' call on IOI Corp, TP at RM4.73

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KUALA LUMPUR (Dec 9): Affin Investment Bank Bhd (Affin IB) is maintaining its 'reduce' call on IOI Corp Bhd with a target price of RM4.73. "Our price target of RM4.73 based on a target CY13 price-earnings ratio of 16 times and 'reduce' recommendation for the stock are also maintained," Affin IB said today in a report.

"With the plantation business and related operations contributing over 70% of group profit and are comparatively less risky than property development, more critical for the valuation of the stock is the crude palm oil average selling price in the coming quarters, which we have assumed at RM2,800 per tonne," Affin IB added.

For the first quarter ended Sept 30, 2012, IOI Corp registered a net profit increase from RM272.8 million last year to RM613.7 million this year. However, third quarter revenue decreased from RM4.1 billion last year to RM3.4 billion this year.

According to Affin IB, IOI Corp has taken full control of a high-rise mixed-use development in Xiamen, China. IOI Corp announced Jan 8 that Palmy Max Ltd (a 99.8% subsidiary) acquired 50% equity interest held by Teijan Management Ltd in a jointly controlled entity, Prime Joy Investments Ltd, for a total cash consideration of US$9.3 million (RM28.3 million).

The acquisition also entails the full settlement of shareholder advances owed by Prime Joy to Teijan Management amounting to US$30.2 million. The sole asset of Prime Joy is a 7.7-acre piece of land in Xiamen.

The acquisition will allow IOI Corp to have full control of the high-rise mixed-use development on the parcel. The land was acquired in 2010 at a cost of RMB314 million (RM153.5 million).

Despite obtaining full control of the development project, Affin IB said the group had a bigger independent property development project with a gross development value (GDV) of RM2 billion in Xiamen that includes the construction of a shopping mall, a hotel, offices and residential units over a two-year period.

"Having studied the property market in China for the last three years, the group see these development projects as viable sources of revenue. Given the quantum of the land costs and potential GDVs relative to the size of the group, net gearing is unlikely to increase significantly from the 0.32 times as at Sept 30, 2012," Affin IB stated.

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