Indofood Sukses Makmur - SIMP IPO: capital raising or transfer? - MACQUARIE RESEARCH

Event
§ Indofood Agri (IFAR SP, Not Rated), which is 58.2%-owned by INDF, has announced the outcome of its SIMP IPO book-build process, including that it has agreed to sell 3,163m new SIMP shares (representing 20% of SIMP's expanded shares on issue) at a price of Rp1,100/share. The offer will therefore raise Rp3,480bn (cUS$400) and capitalise SIMP at Rp17,398bn. The IPO is currently expected to take place on 9 June 2011.

Impact
§ A straight value transfer from IFAR holders to new SIMP holders: We are extremely disappointed with the terms of this transaction, which we estimate will succeed in unnecessarily transferring S$224m of value from existing IFAR shareholders to new SIMP shareholders (amounting to S$0.156 per IFAR share, or 8%) – an outcome about which most IFAR shareholders will quite rightly feel aggrieved. As a 58.2% shareholder in IFAR, and also direct owner of an additional 8.4% of SIMP, INDF will also be impacted, with the estimated value destruction to INDF shareholders estimated at Rp120/share (c2%).
§ Implied capital raising price is S$1.26/share (a 38% discount): The key issue is that all of IFAR's operating and financial interests are held through its 90% shareholding in SIMP (which will be diluted to 72% post-offer). In economic substance, the “IPO” therefore amounts to little more than an IFAR placement. We highlight that the SIMP IPO price is the equivalent of a S$1.26/share IFAR placement price – a 38% discount to IFAR's previous close of S$2.04 (IFAR's share price fell 16% to S$1.72 in Monday's trading).
§ While the capital raised may add some offsetting value over time if it is invested wisely, the capital could also have been procured via a direct IFAR placement at a much lesser discount, or via a rights issue that allowed existing shareholders to avoid being forced to except substantial dilution.

Earnings and target price revision
§ FY11E EPS downgraded by 12%, due to incorporation of our recently downgraded ICBP estimates, as well as INDF's weak 1Q11A result. We are yet to incorporate the dilutionary impact of the SIMP IPO. Price target lowered to Rp5,100 from Rp5,300, in line with our updated M2M NAV.

Price catalyst
§ 12-month price target: Rp 5,100 based on a RNAV methodology.
§ Catalyst: SIMP IPO (currently scheduled for 9 June 2011).

Action and recommendation
§ Neutral maintained: We have previously been calling INDF as a trading sell in the lead-up to the SIMP IPO (see our note An opportunity to lighten, 10 May 2011), with a Rp5,000–5,500 price target range. However, as we believe that the SIMP IPO has been materially underpriced, and will therefore likely perform strongly post IPO, we suggest investors cover their INDF trading short in the low Rp5,000s. However, we also flag that this transaction could contribute to the emergence of a “corporate governance discount” over time.