Moody's says Unico-Desa buy is credit negative for IOI

PETALING JAYA: Moody’s Investors Service has rated IOI Corporation Bhd’s acquisition of Unico-Desa Plantations Bhd as “credit negative”, as it would diminish the former’s existing cash positions.

Last week, IOI Corp had announced that its unit, IOI Plantation Sdn Bhd, would be acquiring Unico-Desa at an RM1bil price tag. The company had triggered a mandatory general offer after having acquired almost 40% of Unico-Desa from companies and parties linked to Unico-Desa’s major shareholder Teoh Hock Chai for RM396.63mil.

Analysts had viewed the acquisition in a different light, saying that the deal was synergistic. PublicInvest Research said the acquisition could enhance IOI Corp’s economies-of-scale and productivity at its plantations in Kinabatangan and Lahad Datu, given its close proximity to Unico-Desa’s major plantation.

Analysts added that the price was in line with market values and justified, taking into account the scarcity of land.

As at end-June, IOI Corp’s cash and cash equivalents stood at RM2.9bil. The company also expects to receive RM1.6bil from the proposed demerger of its property businesses. It intends to fund the acquisition via internally generated funds and/or borrowings.

“The cash consideration for the Unico-Desa acquisition would likely push IOI Corp’s net debt per earnings before interest, tax, depreciation and amortisation (Ebitda) ratio beyond our 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,” said Moody’s in a statement.

This is contrary to what the rating agency had expected, as the company would need to keep more cash on hand for the redemption of its US$500mil (RM1.6bil) US dollar-denominated notes in March 2015.

It added that following the disposal of the property businesses, IOI Corp’s large cash balance was a key rating driver because it would keep the majority of the existing group debt.

However, IOI Corp would be operating with a smaller income and asset base, resulting in a higher gross debt leverage of 4.1 times in 2013, compared to 3.5 times in 2012, as well as a weaker Ebitda interest coverage of 6.4 times.

“The company is also left with reduced business diversity and is wholly exposed to the cyclicality of crude palm oil (CPO) prices. Furthermore, the proposed purchase price of Unico-Desa works out to about RM79,000 per ha, which equates to approximately seven years’ worth of sales at a CPO price of US$700 (RM2,231) per tonne,” it said.

Analysts said the acquisition would help increase IOI Corp’s total fresh fruit bunches production by 6% to 7%.

“Consequently, IOI Corp’s plantation output remains well below its CPO refining capacity and the company would continue to need significant amounts of bought-in CPO to feed its downstream activities,” said Moody’s.

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