This article first appeared in The Edge Financial Daily, on May 11, 2016.

IOI Corp Bhd
(May 10, RM4.18)
Maintain hold with a target price (TP) of RM4.30: IOI Corp Bhd has filed challenge proceedings with the Justice of Peace in Zurich, Switzerland, against the decision made by the Roundtable of Sustainable Palm Oil (RSPO) board of governors to suspend IOI’s RSPO certificate.

To recap, the RSPO board of governors has decided to suspend IOI’s RSPO certification for the entire IOI Group from April 1 onwards until an action plan is submitted and accepted by the RSPO and a peer review of the high conservation value assessments is performed.

According to IOI’s statement, a conciliatory hearing will be held before the Justice of Peace, who will mediate between both parties. The Justice of Peace will grant IOI authorisation to proceed with a formal legal action against the RSPO, to be filed at the District Court in Zurich only if the parties are unable to reach an agreement during the conciliation proceedings.

At the same time, IOI will continue to focus on actions required to lift the RSPO membership suspension. It has revised its action plan after consultation with non-governmental organisations. While IOI hopes it could resolve the issue within a few months, but we believe that the suspension could drag on as it takes a long time to get the issues resolved.

Risks include: i) weaker-than-expected fresh fruit bunch output; ii) escalating crude palm oil production costs; iii) weaker-than-expected recovery in edible oil demand and prices; and iv) prolonged RSPO certificate suspension. No change to our earnings forecasts. We had previously lowered the price-earnings ratio for its downstream operations to reflect the potential reputation impact from the RSPO suspension. Positives include a decent balance sheet and strong cash-flow generation ability, while negatives would be pricey valuations. We maintain “hold” on IOI for now with a TP of RM4.30 based on a sum-of-parts valuation pending the outcome of the challenge proceedings. — Hong Leong Investment Bank Research, May 10