IOI Corporation’s participation in the South Beach project might give the company great opportunity in Singapore’s real estate market but it has also raised concerns. Its growing exposure to the real estate sector could dilute its price earnings as an oil palm planter.
CIMB Research said that it was neutral on IOI’s acquisition of a 49.4 percent stake in City Development’s (CDL) South Beach, in which the company’s potential investment could reach S$815 million (RM1.96 billion).
The company could gain valuable experience and see its position as a Singapore developer grow through its involvement in a high-status project with CDL. Furthermore, the acquisition price could somewhat enhance earnings.
However, CIMB views the company’s further expansion into the Singapore property market with some anxiety.
“The drawback is that the group’s exposure to plantation earnings may be diluted over time and the market may accord the group a lower P/E rating,” said analyst Ivy Ng.
“CDL currently trades at lower P/Es of 14.8x for FY12 and 12.4x for FY13. In comparison, IOI’s is 15.1x for FY12 and 14.1x for FY13. Other apprehensions include CIMB’s subdued outlook for the Singapore property market as well as IOI’s mixed track record in the south,” she added.
As an established Malaysian developer, IOI derives a fourth to a fifth of its profits from property. But a huge amount of its earnings — approximately two-thirds — is derived from palm oil.
As one of Malaysia’s most competent planters, IOI investors have been drawn to the stock for its palm oil earnings, which have continuously improved on the back of increasing crude palm oil prices.
ECM Libra and Maybank said that due to the lack of development details for South Beach, which will be built on 8.64 acres of land, they could not determine its impact on IOI, for which they have a “hold” call.
ECM views limited catalyst for the stock as it does not anticipate CPO prices to rally much further, with the average selling price in 2011 estimated at some RM3,000 per tonne.
Another concern is the criticism that IOI has received over the possible suspension of its ongoing certification process by the roundtable on sustainable palm oil (RSPO), attributed to a disagreement with Sarawak natives over plantation land occupied by the company’s subsidiary IOI Pelita Plantation.
IOI Corp said that it accepts the decision and will work with RSPO “to develop a plan to find an acceptable solution to the issue of compensation.”
“There nonetheless is some risk, as (if) a solution is not reached in the given 28 days, there could be impact on IOI’s exports to the EU and US,” said ECM.