This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.
THE Roundtable on Sustainable Palm Oil’s (RSPO) certificate suspension of the entire supply chain of IOI Corp Bhd’s palm oil production is no doubt a bummer for the group. Since the announcement on March 14, its share price has fallen from a year-to-date high of RM5 to a low of RM4.12, shedding a total of 17.6%.
The counter did see some reprieve last week after it posted a fairly decent quarterly financial results, gaining 3.4% to RM4.26 last Thursday. But by Friday, it had shed four sen to RM4.22. Given the weakness in IOI Corp’s share price over the last few months, it raises the question of whether the counter has been oversold.
Notably, the Employees Provident Fund (EPF) has been actively selling its stake in the integrated palm oil group in the last few months. Filings with Bursa Malaysia show that the EPF had pared its stake to 7.22% stake as at May 16 from 8.81% on Jan 5.
Filings also show that the Lee family has been acquiring shares on the open market through its private vehicle, Vertical Capacity Sdn Bhd. Between January and May, the family acquired about 10 million shares, increasing its stake to 46.97% from 46.66% previously.
IOI Corp’s share price rebounded slightly last week to close at RM4.26 on Thursday after the group announced its financial results for the third quarter ended March 31, 2016 (3QFY2016). Net profit for 3QFY2016 stood at RM748.4 million as compared with a net loss of RM188 million a year ago. Revenue increased marginally to RM2.87 billion, up 4.6% from RM2.76 billion previously.
Over a nine-month cumulative period, net profit increased substantially to RM754.2 million from RM8.2 million a year ago. Revenue increased 3.6% to RM8.92 billion from RM8.61 billion previously.
“The higher profit before tax is due mainly to the lower net foreign currency translation loss on foreign currency denominated borrowings and higher contribution from the resource-based manufacturing segment,” says the group in its financial results report.
Nevertheless, most analysts covering the stock remain unmoved. Bloomberg data shows that there are 14 “sell” calls, 10 “hold” (CIMB Investment Bank Research upgraded its call from “sell”) and one contrarian “buy” call by Maybank Investment Bank Research. The average 12-month target price among these analysts stands at RM4.03.
Many expect the company’s resource-based manufacturing division to feel the pinch going forward, given that about two-thirds of its speciality oils and fats business is derived from Europe and the US.
In its May 10 report, Maybank IB Research says the integrated plantation group has one to 1½ months of certified sustainable palm oil inventory to weather the temporary RSPO suspension.
“Moving forward, we expect that the speciality oils and fats sub-segment will be impacted if measures to lift the suspension of the RSPO certificates do not materialise. Overall, 36% and 15% of IOI Corp’s revenue in FY2015 was derived from Europe and America respectively. According to its announcement, the group is expected to submit a quarterly progress report to the RSPO by the end of May 2016, once the Peer Reviews of the high conservation values have been performed and the necessary action plans have been addressed,” says BIMB Securities Research in a report.
But what is more worrying is that IOI Corp’s major customers for its speciality oils and fats business, such as Unilever, Kellogg, Mars and Nestlé, have announced that they will cease to source palm oil from it. Would this mean a permanent cessation of business from these consumer product giants?
IOI Corp did not reply to The Edge’s questions on plans for its European business in the light of the RSPO suspension.
In its report, Maybank IB Research says IOI Corp believes that some 7.5% of its earnings before interest and tax, on an annualised basis, is at risk due to the RSPO suspension.
“Nonetheless, what is certain is that the shorter the suspension period, the lower the overall financial losses to IOI Corp [will be],” adds Maybank IB Research.
Recently, IOI Corp instituted legal action against RSPO, challenging the suspension. The company is arguing that the suspension should not take effect against its downstream operations and certified palm oil purchase and sales contracts that came prior to the suspension.
Despite the legal challenge, IOI Corp says it is still committed to implementing the action plan, which is required for the lifting of the suspension.
Maybank IB Research opines that the recent selldown due to the RSPO suspension is overdone.
Meanwhile, CIMB Research believes that the decline in IOI Corp’s share price following the suspension has priced in the concerns and sees share price support from a potential buyback exercise.
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