JP MORGAN Research has maintained its June 2008 target price of RM6.30 for IOI Corp Bhd based on a enterprise value-to-capital employed ratio of 3.9 times for FY08. JP Morgan's valuation implies a FY08 price-earnings ratio of 21 times.
IOI has proposed a joint venture (JV) for oil palm cultivation in Kalimantan with Harita Group. The deal, made up of two parts, involves IOI acquiring a 33% stake in PT Bumitama Gunajaya Agro (first JV) with a total planted and unplanted area of 35,340 hectares and 64,000ha respectively and three palm oil mills. The first JV also oversees a "plasma" scheme which covers an area of 22,000ha.
In the second JV, IOI will acquire a 67% stake in several companies with a total plantation land of 128,000ha.
The acquisitions would add to IOI's planted oil palm land of 144,055ha located in Malaysia.
JP Morgan said the total cost for the acquisitions is estimated at US$130 million (RM455 million) based on a total enterprise value of US$385 million.
It said excluding the plasma land bank and the palm oil mills, pricing for the acquisition stood at US$1,693 per ha versus recent transactions in Sumatra for newly-planted land at US$4,500-US$5,500 per ha. (Transactions and asking prices of planted land in Sabah stands at US$6,000-US$7,000 per ha)
"The discount paid by IOI hence, we believe, is because 84% of the land acquired is non-planted, and also given the terrain, oil palm cultivation in Kalimantan is much more capital intensive with higher labour cost compared to Sumatra," it said.
It said the acquisitions coupled with the group's capital repayment would raise FY08 net gearing from 14% to a comfortable 46% given the group's strong cash flows, while full conversion of exchangeable bonds could lower gearing to 23%.
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