By Khairie Hisyam
Reeling from a RM719 million nett loss in the first quarter, IOI Corporation also saw its debts, mainly in the US dollar denomination, inflate by 16% due to the weakening ringgit. Is this dark before dawn or will the turbulence remain for a while?
Business model: IOI Corporation (IOI Corp) is the palm-based arm of the larger IOI Group, which was originally incorporated as Industrial Oxygen Inc Sdn Bhd in 1969 before a name change in 1995.
One of the largest vertically integrated palm oil producers in the world, its businesses encompass palm oil plantations, commodity trading as well as resource-based manufacturing involving palm products, oleochemicals and specialty oils and fats.
According to its website, IOI Corp’s operations span Malaysia, Indonesia, China, the Netherlands, the US and Canada, with 90 palm oil estates in Malaysia and Indonesia totalling some 207,057ha in land bank – of these, 177,680ha are planted with oil palm. It also has 15 palm oil mills across Malaysia with a milling capacity of about 4.6 million fresh fruit bunches (FFB) annually.
For the first quarter ended Sept 30, 2015 (1Q16), IOI Corp posted RM719 million in nett loss from RM3.08 billion quarterly revenue compared to RM176 million in nett profit from RM2.99 billion revenue seen in 1Q15.
The nett loss was mainly due to an 18% strengthening of the US dollar against the ringgit, according to the company’s regulatory filing, which led to a non-cash flow net foreign-exchange (forex) loss of RM853.9 million. A fair value loss on derivative financial instruments of RM202.8 million also hit numbers, the company said.
Shareholders and management: The Lee family, which founded IOI Group, is the single largest shareholder of IOI Corp with 45.5%. The Employees Provident Fund holds 9.1%, while bumiputera equity fund Permodalan Nasional Bhd has 6.6%.
Family patriarch Lee Shin Cheng appear to remain hands-on as executive chairman at age 76, while his son Lee Yeow Chor, aged 49, is chief executive officer. The only other executive board member is Lee Cheng Leang, aged 67, brother to Lee Shin Cheng.
A multi-decade veteran of the plantation sector, Lee Shin Cheng was conferred an Honorary Doctorate Degree in Agriculture by Universiti Putra Malaysia for his contributions to the palm oil industry. He also received the prestigious Malaysian Palm Oil Association (MPOA) Recognition Award 2011 for his contributions and leadership in the industry.
Meanwhile his son Lee Yeow Chor, a barrister by training, is also chairman of the Malaysian Palm Oil Council (MPOC) since 2009. He is a council member in the Malaysian Palm Oil Association (MPOA) since 2002.
Share performance: At the closing bell of Nov 17, 2015, IOI Corp was last traded at RM4.15 per share. This represents a negative one-year return of nearly 10% – on Nov 17, 2014, IOI Corp closed at RM4.70 per share, according to Bloomberg.
IOI Corp shares are slightly more volatile in trading compared to the market with a beta coefficient value of 1.17, according to Reuters. A value of 1 reflects the average volatility of the overall stock market.
Since 2010, IOI Corp has consistently paid out between 49% and 55% of its nett profits as dividends, though this percentage fell to 38% in financial year 2014 (FY14).
For FY15 ended June 30, 2015, the company distributed RM286.3 million of its FY15 company-level nett profits of RM407.4 million – 70% – as dividends, according to its latest annual report. At the group level, IOI Corp posted RM172.4 million in nett profits that year.
What analysts think: Research houses tracked by KINIBIZ are generally unexcited on IOI Corp’s prospects, with seven out of nine research houses advocating a “hold” stance. The other two have outright “sell” calls.
While a number of analysts consider the 1Q16 loss within expectations, high valuations in respect of the stock itself give them pause.
Taking aside forex loss in 1Q16, IOI Corp’s core nett profit dipped 41% year-on-year (y-o-y) mainly due to lower plantation earnings and fair value loss from derivative instruments, said CIMB. Lower average selling price (ASP) for crude palm oil (CPO) and palm kernel dragged down plantation segment earnings by 9%, while FFB production remained flat.
“Resource-based manufacturing earnings before interest and tax grew 47% y-o-y due to improved performances from the oleochemicals and refining margins,” said CIMB Research, adding that it considers “1Q16 results to be in line as we project stronger earnings in future quarters”.
Despite stronger earnings outlook going forward, “rich valuations” remain a drawback, said CIMB, a view reiterated by a number of other research houses.
Meanwhile, forex losses seen in 1Q16, which caused IOI Corp’s nett gearing to balloon from 92% as of 4Q15 to 141% in 1Q16, will only reverse “if the ringgit strengthens from RM4.44 against the US dollar,” said Maybank.
The weaker ringgit in the quarter inflated IOI Corp’s mostly US dollar-denominated debts by 16% quarter-on-quarter to RM7.7 billion. “However, we are not overly concerned about the high nett gearing as IOI’s assets remain at historical costs, while its operating cost structure is one of the lowest in the industry,” said Maybank.
Going forward, potential catalysts for the stock include any potential value-accretive mergers and acquisitions (M&A) exercise, a rally in CPO prices and sustained recovery in the manufacturing segment, said TA Securities.
Earnings forecast:
StockStalk: While there is some turbulence in the plantation sector at large presently, IOI Corp is a solid play for those keen on palm exposure, though pricing and investment horizon are essential points of consideration.
It is important here to recognise that while 97% of IOI Corp’s revenue comes from its resource-based manufacturing segment in FY15, margins lie with plantations – two-thirds of its operating profit come from plantation.
Here there may be some concerns, especially with Malaysian palm inventories hitting another record high in October 2015, taking analysts by surprise as production unexpectedly grew.
That said analysts expect prices, still above RM2,000 per metric tonne in mid-November, to hold going forward. PublicInvest Research, in an earlier report this month, expects prices to be as high as RM2,500 per metric tonne on average next year.
A different industry concern is on whether Malaysian palm exports are losing market share against Indonesian planters as may be indicated in palm oil export volume in October.
Data indicate volume to China, European Union and other nations fell despite pick-up in exports to the US and India, which meant year-to-date CPO exports growth was only at 1.2% for Malaysia compared to a 17% growth for Indonesia.
That said, these are general industry-wide concerns and would not affect plantation players equally. Globally, long-term demand for palm oil is not likely to go anywhere.
Armed with solid fundamentals, IOI Corp in particular has some resilience on the strength of its low operating cost structure as well as massive land bank, of which 14% is in Indonesia.
In addition, the strong presence of the Lee family as a major shareholder would likely ensure a steady stream of dividends for other shareholders, though the quantum would vary year by year. This in turn highlights the inherently volatile nature of the plantation sector at large, a main drawback for investors looking for dividend yield without particular preference for any sector.
All things considered, IOI Corp seems a solid long-term play for those keen on the plantation sector and are prepared to buckle down against the volatility of the sector.
Bear in mind, the company seems in a rough patch at the moment and a very long-term horizon would be more beneficial, especially considering the pricey valuations of the stock at present.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell any stocks. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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