IOI Corp sees lower oil palm FFB output

PUTRAJAYA: IOI Corp Bhd has revised downwards its fresh fruit bunch (FFB) growth to between 3% and 5% for the financial year ending June 30, 2016 (FY16), from the initial forecast of 5% to 7%, due to the prolonged hazy weather.
Speaking to reporters after the company’s AGM here yesterday, CEO Datuk Lee Yeow Chor said the hazy condition, which reduces sunlight hours, will probably affect up to 10% of total FFB.
However, he said it will not have a negative impact on the company’s profitability as low production will boost palm oil prices.
Lee expects palm oil prices to stay strong and stable at the current level on the back of seasonal low production. “There is a good chance for prices to go up at the beginning of next year,” he opined.
The November crude palm oil futures contract on Bursa Malaysia Derivatives settled at RM2,243 a tonne yesterday, up RM35.
The persistent slump in the ringgit has put pressure on IOI Corp’s financials as more than 90% of its borrowings are denominated in US dollars. Currently, its net debt stands at RM4.6 billion.
“We can’t address it (unrealised foreign exchange loss) much, our US dollar borrowings are spread over many years,” he said, noting 50% of borrowings will only expire beyond 2022.
Lee went on to say that the company’s business should be viewed from the operating profit level.
“We don’t look so much on the unrealised forex loss, the most important thing is the outlook, where I see palm oil prices going up in the first quarter of 2016, so it should be positive for our company,” he reiterated.
The downstream business, meanwhile, has been performing well, with the oleochemicals segment a beneficiary of low kernel oil prices.
For FY15, IOI Corp saw its net profit plunge 95.02% to RM168.1 million from RM3.37 billion a year ago, dragged down mainly by a net unrealised forex loss of RM735.3 million and the absence of RM1.9 billion demerger gain with the spin off of its property unit.
Analysts expect it to have swung into the red for the first quarter ended September 2015 due to the forex loss.
A weaker ringgit, Lee said, has increased the cost of fertiliser, which makes up 15% to 20% of the total cost of production of RM1,400 a tonne.
“Let’s say for every 20% gain in the US dollar against the ringgit, it will translate into a 3% increase in the cost of production,” he explained.
Commenting on an increase in minimum wage starting July next year, Lee said it will involve only 15% to 20% of its 25,000-strong workforce in Malaysia. “There will be an impact, we need to evaluate, but it’s not significant.”
Based on calculations, a RM100 rise in the minimum wage will result in an additional labour cost of as much as RM6 million a year for IOI Corp.
On another note, Lee believes the Trans-Pacific Partnership Agreement (TPPA) will have a positive impact on the palm oil industry. “Our main market is the US. With the TPPA, it will reduce the import tariff which is not that much,
less than 5%.”
Lee said IOI Corp’s borrowings now fulfil syariah requirements, but he is unsure if that will be enough to get them back on the list of the Securities Commission’s syariah-compliant stocks, due out at the end of November.
“We’ve converted quite a big part of our non-Islamic borrowings into Islamic borrowings, so we’ve satisfied that part. But sometimes there may be other guidelines,” he added.
The company was excluded from syariah-compliant status in last May as its conventional debt exceeded 33% of total assets.