SINGAPORE, Oct 7 — IOI Corp Bhd’s acquisition of oil palm plantation, Unico-Desa Plantation Sdn Bhd is credit negative, says Moody’s Investors Services in its research note.

Moody’s, in its News & Analysis—Credit Implications of Current Events, said last Wednesday, IOI announced the acquisition of 39.55 per cent of Unico-Desa through its unit, IOI Plantation Sdn Bhd, for RM396.63 million and the mandatory takeover offer for the remaining 60.45 per cent stake for RM606.2 million.           

It said the cash acquisition will diminish IOI’s existing cash positions.

“The total acquisition cost, including the remaining 60.45 per cent stake, is approximately RM1 billion, plus net debt of RM15 million.

“IOI reported RM2.9 billion of cash and cash equivalents at the end of June, although it will receive about RM1.6 billion from the proposed demerger of its property businesses later this year,” it said.

The ratings agency said the cash consideration for the Unico-Desa’s acquisition will likely push IOI’s net debt/earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio beyond its downward rating trigger of 1.5x by the end of the fiscal year ending June 2014 after deconsolidating the EBITDA of its property business.

“We previously expected IOI to maintain its net debt/EBITDA ratio at around 1.0x-1.5x after the property spinoff and in particular, to keep higher levels of cash on hand in the run-up to the redemption of its RM1.6 billion in US dollar-denominated notes in March 2015.             

“We view IOI’s large cash balance as a key rating driver following the disposal of its property businesses, because IOI will keep the majority of the existing group debt,” it said.

However, Moody’s said, IOI will be operating with a smaller income and asset base consisting solely of its plantation operations, resulting in higher gross debt leverage of 4.1x in fiscal 2013 (versus 3.5x in fiscal 2012) and weaker EBITDA interest coverage of 6.4x (versus 13.8x in fiscal 2012) after reclassifying the property segments as discontinued operations.

It said the company was also left with reduced business diversity and was wholly exposed to the cyclicality of crude palm oil (CPO) prices.

“In addition, the proposed purchase price for Unico-Desa works out to about RM79,000 per hectare, which equates to approximately seven years’ worth of sales at a CPO price of US$700 per tonne,” it said.

Moody’s said yields achieved at Unico-Desa’s plantations were already close to the levels of IOI’s, leaving little scope for IOI’s management team to extract better results.

“Unico-Desa reported fresh fruit bunch (FFB) yield of 23.80 tonnes per ha and a CPO extraction rate of 20.33 per cent for the fiscal year ended March 2013 compared to IOI’s FFB yield of 24.46 tonnes per ha and CPO extraction rate of 20.84 per cent for fiscal year ended June 2013,” it said.

It said IOI’s plantations were ageing, with a large proportion of prime and past prime trees, and the age profile will not improve materially after the acquisition because it added less than eight per cent to IOI’s existing planted oil palm area.

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