IOI Corporation

Premium Unlikely Affected By Dato’ Yeo’s Departure

Besides a dip in crude oil price and hence CPO price yesterday, IOI Corp’s stock price was hit by news of Dato’ Yeo How’s resignation. Dato’ Yeo is the financial controller and executive director who helped to build IOI Corp to what it is today.

COMMENTS
Knee-jerk reaction not surprising. Being the financial mastermind who helped to map IOI Corp’s strategy, Dato’ Yeo’s departure will certainly cause some discomfort among investors as Dato’ Yeo is the face of IOI Corp whom investors are familiar with. Nevertheless, we are comforted by the fact that:

1. Dato’ Yeo is leaving to join a large unlisted plantation company to which he can add tremendous value.
2. There is no corporate governance issue in IOI Corp which led to Dato’ Yeo’s leaving the company.
3. There’s no issue with continuity. Dato’ Lee Yow Chor, Tan Sri Lee’s eldest son will likely take over the operations overseen by Dato’ Yeo, namely the Rotterdam operation. Dato’ Yeo’s able deputy Mr Kong Chee Koon will stay put and take over some of the job functions. Mr Kong is also a familiar face to investors and analysts.

Premium valuation will not be impacted. After the smoke clears, we believe IOI will continue to command premium valuation to its peers. We are of the opinion that IOI’s premium valuation comes from:

1. Strong corporate governance, which will unlikely deteriorate just because of Dato’ Yeo’s departure.
2. More importantly, we think it is IOI’s value chain that is the key source of its premium valuation as the value chain IOI has built is unsurpassed by any other plantation company bar Wilmar International. This is why Wilmar commands the highest PE valuation (25.5x CY08 PE)in the oil palm plantation space. While we are impressed by Mr Kuok Khoon Hong and his team, Wilmar has really been listed too short a time for anybody to say much about its corporate governance. Hence Wilmar’s premium really must come from its value chain. If the value chain that Dato’ Yeo helped to build over the past 25 years (and which Tan Sri Lee spent his lifetime building) can be broken by Dato’ Yeo’s departure, that would be saying IOI has not built any sustainable competitive advantage. This we think is the furthest from the truth.

Dato’ Yeo’s departure paves way for mega merger? Dato’ Yeo will be joining an unlisted Indonesian plantation company, to be based in Singapore. According to our sources, there are 2 Indonesian plantation companies with offices in Singapore namely Musim Mas with about 100k ha planted area and Raja Garuda Mas with more than 200k ha. We believe Dato’ Yeo will be joining the latter with plans to take it public. This could pave the way for a mega merger between IOI Corp and the large Indonesian plantation. We wonder what company would Tan Sri Lee rather acquire than one which is run by his trusted right hand man? Also, of the large Malaysian plantation companies, IOI is the slowest in making inroads into Indonesia. While IOI already has a toehold in Indonesia, planted area is minimal. A merger will give IOI a springboard into Indonesia and immediately increase IOI’s planted hectarage to 350k ha, which is the size of Golden Agri Resources (Buy, TP SG$1.37).

Buy into weakness. IOI currently trades at 19x CY08 earnings, which is not expensive for a worldclass company. Our target price of RM8.75 is based on 23.8x CY08 EPS. We suggest taking the opportunity to buy into the stock price weakness, which we think will be temporary.

From: OSK Research 29 May 2008