Hold call on IOI Corp as group challenges RSPO decision

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KUCHING: Analysts retain their hold call on IOI Corporation Bhd (IOI Corp) as the group challenges the decision made by the Roundtable of Sustainable Palm Oil (RSP) to suspend IOI’s RSPO certificates.

To recap, RSPO’s board of governors decided to suspend IOI Corporation’s RSPO certification for the entire IOI Group from April onwards until action plan has been submitted and accepted by RSPO and Peer Review of the HCV assessments has been performed.

IOI Corp has filed a challenge proceeding with Justice of Peace in Zurich, Switzerland.

According to IOI’s statement, a conciliatory hearing will be held before the Justice of Peace who will be mediate between both parties.

“The Justice of Peace will grant IOI authorisation to proceed with a formal legal action against RSPO, to be filed at the District Court in Zurich only if the parties are unable to reach agreement during the conciliation proceedings,” noted analysts at Hong Leong Investment Bank Bhd (HLIB Research), who maintained their hold call on the group.

“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 NGOs.

“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.”

Researchers at Maybank Investment Bank Bhd (Maybank IB Research) also maintained their hold call on IOI Corp, citing that the group wide suspension had not been anticipated by IOI, especially its downstream division.

“IOI hopes to get the suspension lifted soon, in two months at the earliest. But we believe it is more realistic to assume that it would take six to 12 months for IOI’s suspension to be lifted,” it said in a separate report.

“In the meantime, IOI has between one to 1.5 months of Certified Sustainable Palm Oil (CSPO) inventory to weather the temporary RSPO suspension.”

Besides losing the CSPO premium, MaybNK IB Research said IOI risks losing some of its European and North American sales under its downstream specialty oils and fats division as some multinational corporations such as Unilever, Kelloggs, and Mars require RSPO certified CPO and have thus suspended — or are in the midst of suspending — purchase from IOI.

“IOI guides that its CSPO premium accounts for less than 0.5 per cent of revenue or approximately three per cent of its earnings before interest and tax (EBIT),” Maybank IB guided.

“Meanwhile its downstream specialty oils and fats earnings were 11 per cent of group EBIT in FY6 and FY15 of which about 35 per cent was from the European Union, 35 per cent from North America and 30 per cent from Asian buyers.

“Combined, IOI believes that approximately 7.5 per cent of its group EBIT is at risk — on an annualised basis — due to this RSPO suspension. Nonetheless, what is certain is the shorter the suspension period, the lower the overall financial losses to IOI.”

CPO price remains IOI’s key earnings driver, the research house said, as approximately two-thirds of IOI’s EBIT are derived from its upstream earnings.

“While IOI may have to forego its CSPO premium during the RSPO suspension, we doubt IOI will face any difficulties in selling its palm oil to non CSPO markets such as China, India, and Africa.

“In the meantime, the present lofty CPO and palm kernel prices at RM2,609 per tonne and RM2,301 per tonne will help to offset the decline in downstream earnings. Our current forecasts impute RM2,300 per tonne CPO average selling price for FY17.”

Maybank IB Research maintained its hold call on the group at a target price of RM4.97. Meanwhile, HLIB Research made the same hold call with a target price of RM4.30 per share.