Published October 29, 2008

IOI Corp dives 11% but analysts see opportunity

By S JAYASANKARAN
IN KUALA LUMPUR
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SHARES of IOI Corporation closed almost 11 per cent lower at RM2.19 yesterday in a sea of red on the Kuala Lumpur stock exchange as the overall market shed 3 per cent.

IOI was battered after news on Friday that it may have suffered what Citigroup estimates could have been RM165 million in translation losses on foreign exchange and futures contracts.

The company itself has made no such estimate, telling Bursa Malaysia last week that translation losses or gains are routine matters in the ordinary course of business.

Even so, some analysts have begun scenting unusual opportunity in the company's depressed share price.

IOI's capitalisation has dropped RM25 billion in the past three months, to RM16 billion last Friday.

Citigroup estimates the 'fair' valuation of IOI at RM7.45, for potential upside of 329 per cent.

There are strong reasons to justify such optimism.

IOI is the world's largest integrated oil palm company and the most efficient producer in Malaysia, with a yield per hectare of 28.65 tonnes - the highest in the business.

In addition, IOI has consistently delivered returns on equity of over 20 per cent - again, among the highest in the business.

Its share price slump illustrates some of the perils of being an institutional favourite.

Over 30 per cent of its shareholding has been foreign held, and overseas redemptions by mutual funds have seen foreigners cashing out of blue chip stocks like IOI to meet demand back home.

Citigroup's optimism is based on a couple of factors, not least of which is the price of crude palm oil (CPO), which it believes to be grossly undervalued at below RM1,350 a tonne.

'Since the early 1980s, the long term historical price of CPO has been RM1,444 per tonne,' it pointed out in a report.

Its price target is based on a long-term CPO price of RM2,475 per metric tonne.

Still, Citigroup's optimism may be a trifle overstated.

At its target price, IOI would be trading at 22 times 2009 earnings and 21 times 2010 earnings, which is steep given the current bear conditions worldwide.

But the bank argues that IOI deserves to be trading at the higher end of its historical price-earnings trading band 'given the underlying supply-demand fundamentals of the edible oil sector'.