MARKET DEVELOPMENT
IOI’s Acquisition of Unico-Desa is Credit Negative: Moody\'s
IOI’s Acquisition of Unico-Desa is Credit Negative: Moody\'s
08/10/2013 (The Star) - Moody’s Investors Service says IOI Corp Bhd’s announced acquisition of 39.55% of Unico-Desa Plantation Bhd through its unit, IOI Plantation Sdn Bhd, and the mandatory takeover offer it will make for the remaining shares, is a credit negative.
“The cash acquisition will diminish IOI’s existing cash positions,” Moody’s said.
“The total acquisition cost, including the remaining 60.45% stake, is approximately RM1bil, plus net debt of RM15mil. IOI reported RM2.9bil of cash and cash equivalents at the end of June, although it will receive about RM1.6bil from the proposed de-merger of its property businesses later this year.”
According to the ratings agency, the cash consideration for the Unico acquisition will likely push IOI’s net debt/EBITDA ratio beyond its downward rating trigger of 1.5 times by the end of the fiscal year ending June 2014 after deconsolidating the EBITDA of its property business.
It said it had expected IOI to maintain its net debt/EBITDA ratio at around 1.0 time-1.5 times after the property spin-off and, in particular, to keep higher levels of cash on hand in the run-up to the redemption of its RM1.6bil in US dollar-denominated notes in March 2015.
“We view IOI’s large cash balance as a key rating driver following the disposal of its property businesses, because IOI will keep the majority of the existing group debt. However, it will be operating with a smaller income and asset base consisting solely of its plantation operations, resulting in higher gross debt leverage of 4.1 times in fiscal 2013 (versus 3.5 times in fiscal 2012) and weaker EBITDA interest coverage of 6.4 times (versus 13.8 times in fiscal 2012) after reclassifying the property segments as discontinued operations,” Moody’s explained.
It pointed out that the company would be left with reduced business diversity and would be wholly exposed to the cyclical nature of crude palm oil (CPO) prices. In addition, it said, the proposed purchase price for Unico works out to about RM79,000 per hectare (ha), or about seven years’ worth of sales at a CPO price of US$700 per tonne.
It said yields achieved at Unico’s plantations were already close to the levels of IOI’s, leaving little scope for IOI’s management team to extract better results.
“Unico reported fresh fruit bunch (FFB) yield of 23.80 tonnes per ha and a CPO extraction rate of 20.33% for the fiscal year ended March 2013, compared to IOI’s FFB yield of 24.46 tonnes per ha and CPO extraction rate of 20.84% for fiscal year ended June 2013.
“IOI’s plantations are aging, with a large proportion of prime and past-prime trees, and the age profile will not improve materially after the acquisition because it adds less than 8% to IOI’s existing planted oil palm area.
“Consequently, IOI’s plantation output remains well below its CPO refining capacity and the company will continue to need significant amounts of bought-in CPO to feed its downstream activities,” Moody’s concluded.
“The cash acquisition will diminish IOI’s existing cash positions,” Moody’s said.
“The total acquisition cost, including the remaining 60.45% stake, is approximately RM1bil, plus net debt of RM15mil. IOI reported RM2.9bil of cash and cash equivalents at the end of June, although it will receive about RM1.6bil from the proposed de-merger of its property businesses later this year.”
According to the ratings agency, the cash consideration for the Unico acquisition will likely push IOI’s net debt/EBITDA ratio beyond its downward rating trigger of 1.5 times by the end of the fiscal year ending June 2014 after deconsolidating the EBITDA of its property business.
It said it had expected IOI to maintain its net debt/EBITDA ratio at around 1.0 time-1.5 times after the property spin-off and, in particular, to keep higher levels of cash on hand in the run-up to the redemption of its RM1.6bil in US dollar-denominated notes in March 2015.
“We view IOI’s large cash balance as a key rating driver following the disposal of its property businesses, because IOI will keep the majority of the existing group debt. However, it will be operating with a smaller income and asset base consisting solely of its plantation operations, resulting in higher gross debt leverage of 4.1 times in fiscal 2013 (versus 3.5 times in fiscal 2012) and weaker EBITDA interest coverage of 6.4 times (versus 13.8 times in fiscal 2012) after reclassifying the property segments as discontinued operations,” Moody’s explained.
It pointed out that the company would be left with reduced business diversity and would be wholly exposed to the cyclical nature of crude palm oil (CPO) prices. In addition, it said, the proposed purchase price for Unico works out to about RM79,000 per hectare (ha), or about seven years’ worth of sales at a CPO price of US$700 per tonne.
It said yields achieved at Unico’s plantations were already close to the levels of IOI’s, leaving little scope for IOI’s management team to extract better results.
“Unico reported fresh fruit bunch (FFB) yield of 23.80 tonnes per ha and a CPO extraction rate of 20.33% for the fiscal year ended March 2013, compared to IOI’s FFB yield of 24.46 tonnes per ha and CPO extraction rate of 20.84% for fiscal year ended June 2013.
“IOI’s plantations are aging, with a large proportion of prime and past-prime trees, and the age profile will not improve materially after the acquisition because it adds less than 8% to IOI’s existing planted oil palm area.
“Consequently, IOI’s plantation output remains well below its CPO refining capacity and the company will continue to need significant amounts of bought-in CPO to feed its downstream activities,” Moody’s concluded.