MARKET DEVELOPMENT
CIMB Research Maintains Reduce on IOI Corp
CIMB Research Maintains Reduce on IOI Corp
28/03/2016 (The Star) - CIMB Equities Research is maintaining its Reduce for plantation heavyweight for IOI Corp on its rich valuations and rising concerns about the suspension of its RSPO.
The research house said on Monday the Roundtable Sustainable Palm Oil (RSPO) announced that it is suspending the RSPO certification for the entire IOI Group from April 1, 2016.
“This is negative as it could affect the group’s ability to earn certified sustainable palm oil premium and dent its image as a sustainable palm oil producer.
Preliminary estimates reveal a potential earnings impact of 3.5% for FY6/17.
“Maintain Reduce due to its rich valuations and concerns over the suspension,” it said.
CIMB Research said IOI Corp’s share price fell 7% from its recent peak of RM5 on March 14 March due to this news and concerns over weaker output from Sabah estates.
“In 8MFY16, the group’s fresh fruit bunches (FFB) output fell by 7% which is below its guidance of 1%-2% growth. The drop in share price appears to have priced in some of the concerns regarding RSPO suspension.
“Our key concern is this news could lead to selling by foreign funds concerned about the sustainability issue. We maintain our Reduce rating,” it said
Last Friday, RSPO announced that its board of governors had endorsed the recommendation made by the Complaints Panel (CP) to suspend RSPO certifications for the entire IOI Group, until such time that the CP is satisfied that IOI has met the conditions set out in its letter on March 14, 2016.
Events that led to the suspension.
* A complaint was lodged by Aid Environment on April 3, 2015 regarding IOI Group’s plantation subsidiaries in Indonesia, namely PT Sukses Karya Sawit (PT SKS), PT Berkat Nabati Sawit (PT BNS) and PT Bumi Sawit Sejahtera (PT BSS).
* According to the complaint, IOI Group is alleged to have violated the Roundtable Sustainable Palm Oil (RSPO) Principles and Criteria, and RSPO procedures.
* Alleged violations include: (1) no new planting policy published; (2) no challenging time-bound plan; (3) land clearing without IUP; (4) fraudulent statement on activity on the ground; (5) no concession boundary filed; (5) encroachment; and (6) deep peat clearance.
Conditions for lifting of suspension
* The RSPO Complaint Panel has revealed in its letter to IOI Corp on March 14, 2016 that it has found the group to have not complied with RSPO rules, and instructed IOI Corp to submit an action plan to address all the issues outlined in the decision in a comprehensive manner.
* The panel has recommended that the group’s RSPO certification be suspended at least until such time as the above actual plan has been submitted and accepted by RSPO and until the peer reviews of the HCV assessments have been performed.
"This is negative for IOI Corp as : (1) it could affect the group’s s ales of certified sustainable palm oil to its customers in Europe; and (2) it could dent the group’s reputation and image as a sustainable palm oil producer. IOI Corp has revealed that the Certified Sustainable Palm Oil (CSPO) premium on its palm oil represents less than 0.5% of its revenue,” said CIMB Research.
The research house said pending clarification from management, we deduced the CSPO premium value to be approximately RM58mil, assuming 0.5% of its FY6/15 total revenue relate to the CSPO premium.
“Based on this, the impact to our FY17 net profit works out to be around 3.5%. However, this does not take into account potential loss of customers or additional costs incurred to purchase CSPO from third parties to fulfill contracted CSPO volumes to customers,” it said.
CIMB Research said this is the second time that IOI Corp has been suspended. On April 1, 2011, RSPO suspended certification process for all IOI group’s activities due to a complaint byseveral NGOs and the local community of Sarawak regarding its Sarawak estates.
The suspension was lifted on Feb 4, 2013. The share price of IOI Corp fell 14% during the period due to this, lower CPO prices and other factors.
The research house said on Monday the Roundtable Sustainable Palm Oil (RSPO) announced that it is suspending the RSPO certification for the entire IOI Group from April 1, 2016.
“This is negative as it could affect the group’s ability to earn certified sustainable palm oil premium and dent its image as a sustainable palm oil producer.
Preliminary estimates reveal a potential earnings impact of 3.5% for FY6/17.
“Maintain Reduce due to its rich valuations and concerns over the suspension,” it said.
CIMB Research said IOI Corp’s share price fell 7% from its recent peak of RM5 on March 14 March due to this news and concerns over weaker output from Sabah estates.
“In 8MFY16, the group’s fresh fruit bunches (FFB) output fell by 7% which is below its guidance of 1%-2% growth. The drop in share price appears to have priced in some of the concerns regarding RSPO suspension.
“Our key concern is this news could lead to selling by foreign funds concerned about the sustainability issue. We maintain our Reduce rating,” it said
Last Friday, RSPO announced that its board of governors had endorsed the recommendation made by the Complaints Panel (CP) to suspend RSPO certifications for the entire IOI Group, until such time that the CP is satisfied that IOI has met the conditions set out in its letter on March 14, 2016.
Events that led to the suspension.
* A complaint was lodged by Aid Environment on April 3, 2015 regarding IOI Group’s plantation subsidiaries in Indonesia, namely PT Sukses Karya Sawit (PT SKS), PT Berkat Nabati Sawit (PT BNS) and PT Bumi Sawit Sejahtera (PT BSS).
* According to the complaint, IOI Group is alleged to have violated the Roundtable Sustainable Palm Oil (RSPO) Principles and Criteria, and RSPO procedures.
* Alleged violations include: (1) no new planting policy published; (2) no challenging time-bound plan; (3) land clearing without IUP; (4) fraudulent statement on activity on the ground; (5) no concession boundary filed; (5) encroachment; and (6) deep peat clearance.
Conditions for lifting of suspension
* The RSPO Complaint Panel has revealed in its letter to IOI Corp on March 14, 2016 that it has found the group to have not complied with RSPO rules, and instructed IOI Corp to submit an action plan to address all the issues outlined in the decision in a comprehensive manner.
* The panel has recommended that the group’s RSPO certification be suspended at least until such time as the above actual plan has been submitted and accepted by RSPO and until the peer reviews of the HCV assessments have been performed.
"This is negative for IOI Corp as : (1) it could affect the group’s s ales of certified sustainable palm oil to its customers in Europe; and (2) it could dent the group’s reputation and image as a sustainable palm oil producer. IOI Corp has revealed that the Certified Sustainable Palm Oil (CSPO) premium on its palm oil represents less than 0.5% of its revenue,” said CIMB Research.
The research house said pending clarification from management, we deduced the CSPO premium value to be approximately RM58mil, assuming 0.5% of its FY6/15 total revenue relate to the CSPO premium.
“Based on this, the impact to our FY17 net profit works out to be around 3.5%. However, this does not take into account potential loss of customers or additional costs incurred to purchase CSPO from third parties to fulfill contracted CSPO volumes to customers,” it said.
CIMB Research said this is the second time that IOI Corp has been suspended. On April 1, 2011, RSPO suspended certification process for all IOI group’s activities due to a complaint byseveral NGOs and the local community of Sarawak regarding its Sarawak estates.
The suspension was lifted on Feb 4, 2013. The share price of IOI Corp fell 14% during the period due to this, lower CPO prices and other factors.