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Fitch affirms IOI Corporation at 'BBB+' after acquisition plan

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Oct 10 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Malaysia-based crude palm oil (CPO) producer IOI Corporation Berhad's (IOI) Issuer Default Rating at BBB+ after IOI's announcement of its proposed acquisition of Malaysia-based listed plantation company Unico-Desa Plantations Berhad (Unico-Desa). The Outlook is Stable.

The senior unsecured rating on IOI Ventures (L) Berhad's USD500m notes due 2015, which are guaranteed by IOI, has also been affirmed at 'BBB+'.

IOI on 2 October 2013 said it proposed to buy Unico-Desa for MYR1,002.81m (USD310.7m) in cash. Unico-Desa's reported net book value as of 30 June 2013 was MYR728.8m. IOI, through its wholly owned subsidiary IOI Plantations Sdn Bhd (IOI Plantations), has already paid MYR396.63m to acquire a 39.55% stake in Unico-Desa. IOI Plantations will extend a mandatory takeover offer to acquire the remaining 60.45% stake in Unico-Desa.

Unico-Desa would only remain as a listed entity if IOI were to acquire less than nine-tenths of the nominal value of the remaining shares. The remaining shares exclude the Unico-Desa shares already owned by IOI Plantations prior to the extension of the mandatory takeover offer.


Opportunistic Acquisition: Fitch views the Unico-Desa acquisition as a one-time opportunistic move and expects IOI to continue focusing on its core businesses of CPO plantations and resource-based manufacturing while maintaining its current scale. The Unico-Desa acquisition will enable IOI to augment its in-house CPO supplies and improve its refinery capacity utilization. While IOI is an integrated palm oil producer whose operations encompass plantations, CPO refineries and production of olechemicals and specialty oils and fats, Unico-Desa is a pure plantation operator. IOI is a net purchaser of CPO and the capacity utilization of its refineries was 70% in FY13.

Cash Funded Acquisition: IOI will be funding the Unico-Desa acquisition with its outstanding cash and liquid investments of MYR2.97bn as of 30 June 2013. IOI is targetting to list its property business by Q214, which will result in debt reducing by MYR500m and a cash inflow of MYR1.9bn.

IOI's Leverage to Moderate: As of 30 June 2013, Unico-Desa's net debt was just MYR15.15m. On completion of the property arm's listing and the Unico-Desa acquisition, Fitch estimates IOI's FFO-adjusted net leverage will reduce to around 1.5x from 3.26x as of 30 June 2013.

Efficient Operating Metrics: As of 31 March 2013, Unico-Desa's total planted area was 12,700 ha, and it will augment IOI's CPO planted area of 160,626 ha by 7.9%. Unico-Desa's FY13 fresh fruit bunch (FFB) yield and oil extraction rate (OER) of 23.80 metric tonnes/hectare (mt/ha) and 20.33% are in line with IOI's efficient operating metrics, that is, FFB yield of 24.46 mt/ha and OER of 20.84%.

Stable Credit Profile: IOI's ratings continue to be supported by its resilient margins in the face of declining global CPO prices due to its favorable plantation profile and efficiencies.


Negative: Future developments that may, individually or collectively, lead to negative rating action include

- A worsening of its business risk profile as a result of becoming more acquisitive and/or more aggressive growth

- FFO-adjusted net leverage being sustained at over 1.75x, which could be driven by aggressive growth or changes in capital management

Positive: No positive rating action is expected in the medium term due to exposure to cyclical risks and business concentration risk.