Saturday, 25 July 2009

Report: New IOI debt sign of ‘more subdued outlook’

Saturday July 25, 2009 The Star, Malaysia


PETALING JAYA: IOI Corp Bhd’s share price fell 12 sen to RM4.86 following the planter’s proposal to issue renounceable rights involving almost 421 million shares on the basis of 1-for-15.

OSK Investment Bank said in a report the exercise was perceived as a negative signal of “more subdued outlook.”

In the past, whenever the plantation company issued new debt, its gearing level would rise significantly but would quickly drop, thanks to strong cash generation and strong stock performance, it said.

“The rights issue makes us suspect that the management may be concerned about its future cashflow generation getting weaker than before. Without the rights issue, its gearing may linger at current levels much longer than desired,” OSK added.

The rights issue price of RM2.90 each was at a 38.3% discount to the theoretical ex-rights price of RM4.70 based on the five days’ weighted average market price (until July 22, 2009) of RM4.82. IOI, whose share capital will be enlarged by 6%, intends to use the proceeds of some RM1.2bil for capital expenditure (capex) and repay borrowings.

OSK said part of the funds was likely to finance the construction of a new 300,000-tonne refinery in Rotterdam, as well as increase by an additional 100,000-tonne, specialty fats capacity at Pasir Gudang, Johor.

IOI is also in the midst of developing 60,000ha in Kalimantan into oil palm plantations.

HwangDBS Vickers Research also said that the proceeds were likely to fund new planting capex at the group’s Indonesian estates. The proceeds would help lower the fiscal year ended June 30 (FY09)’s gearing to 0.23 times from 0.42 times, it said.

According to a report by TA Securities, if IOI’s major shareholder, Progressive Holdings Sdn Bhd, were to fully subscribe to its entitlement, the capital commitment was estimated at about RM463mil.

While it had left its earnings forecast of IOI unchanged for FY10, the brokerage said there was still downside risks to the share price, including crude palm oil running ahead of expectations, a crude oil price rally and a weak US currency.

A local brokerage said while the rights issue might not be ideal, it was probably the easiest and fastest way to raise the required funds in the current tight capital market.

IOI was likely to use the proceeds to refinance some of its convertible bond issues, of which one is due in 2011 and another in 2013, it said.

A bank-backed research house, meanwhile, believed IOI was building its war chest for major acquisitions given that it was in a healthy financial position.

IOI’s free cashflow for FY10 is estimated at about RM1.5bil versus capex needs of RM500mil. As at May 8, unutilised proceeds from the third exchangeable bonds totalled RM732mil.

Regional plantation companies also seemed to be on a fund-raising spree, the research house said, noting that Wilmar International Ltd was listing its China operations in Hong Kong while Indofood Agri-Resources was mulling a 1 trillion rupiah bond issue.