This article first appeared in The Edge Financial Daily, on May 9, 2016.

IOI Corp Bhd
(May 6, RM4.30)
Upgrade to hold with an unchanged target price (TP) of RM4.24: With regard to the temporary Roundtable on Sustainable Palm Oil (RSPO) membership suspension, IOI Corp Bhd has revised its action plans after discussions with non-governmental organisations. Meanwhile, its high-conservation value assessment reports will be reviewed by an RSPO-approved reviewer. 

IOI Corp has also engaged the Global Environment Centre, a specialist in peatland conservation and rehabilitation, and Proforest, a consultant on responsible production and sourcing, as well as land use and conservation. 

A prolonged RSPO suspension will significantly affect IOI Corp’s specialty oils and fats business, which accounts for around 11% of its earnings before interest and tax.

We expect its fresh fruit bunch (FFB) production to decline by 5% to 6% in financial year 2016 (FY16), but barring a reoccurrence of extreme weather conditions, grow by 6% to 8% in FY17. The group is still looking to acquire more plantation land to boost crude palm oil (CPO) supply for its downstream operations. 

Pending the outcome of the next RSPO meeting on its membership, possibly in May, we maintain our forecasts and TP for IOI Corp. We believe its valuation has moderated, and upgrade our rating from “sell” to “hold”. We expect its third quarter of FY16 core net profit to be lower quarter-on-quarter, mainly due to lower contributions from the upstream segment. 

Key downside risks include a prolonged RSPO membership suspension and sharp decline in CPO prices, while key upside risks include a sharp rise in vegetable demand and change in policies leading to higher CPO prices. — Affin Hwang Capital, May 6