IOI Corp to address RSPO issue

PETALING JAYA: IOI Corporation Bhd (IOI Corp) saw its shares shed 6 sen, or 1.21% at the opening bell yesterday after a report by Hong Leong Investment Bank (HLIB) said that the plantation firm faces a potential downside risk to earnings if the group’s Roundtable for Sustainable Palm Oil (RSPO) certification is suspended.
The stock, however, recovered after the lunch break to end the day with a 3 sen gain, or 0.61%, to RM4.96 with 11.4 million shares traded.
A Bloomberg report said that the RSPO Complaints Panel had recommended that its board of governors suspend IOI Corp’s SPO certification until an action plan has been submitted and accepted by RSPO and Peer Review of the high conservation value (HCV) assessments performed.
IOI allegedly was non-compliant with RSPO’s rules regarding possession of environmental permits, and clearing of fragile land in Indonesia.
“We view this as a potential downside risk to IOI Corp as suspension of RSPO certification would impact its downstream operation. Its customers, especially those in EU and USA, might switch to other suppliers in order to comply with their sustainability policies,” HLIB analyst Chan Yuan She said.
She noted that IOI Corp’s downstream operation accounted for about 30% of its total FY15 operating profit.
According to Chan, IOI Corp will submit its action plan to RSPO within the next two weeks. It is also seeking clarification on the scope of suspension whether it applies to the group as a whole or only applicable to the certification of new developments.
“Nevertheless, RSPO board is expected to make a decision regarding this issue in the next few weeks,” Chan said.
Meanwhile, IOI Corp’s sustainability senior manager Yeo Lee Nya told Bloomberg that an action plan will be submitted to the RSPO, prior to the stipulated deadline.
“We believe that this matter will be resolved without any adverse impact to IOI,” said Yeo, adding that IOI Corp’s plantation operations in Indonesia would not be affected by the recommended suspension.
In August 2015, the RSPO had issued a stern warning to IOI Corp to address serious legal and policy non-compliances in Kalimantan, or face expulsion from the Certified Sustainable Palm Oil (CSPO) market.
In March that year, environmental consultant, Aidenvironment, revived and expanded an earlier complaint filed four years earlier on IOI Corp. The grievance alleges that IOI’s majority owned subsidiaries in West Kalimantan seriously flouted RSPO’s standards and procedures.
With over 140,000 hectares of RSPO-certified land bank and 12 certified mills, the IOI Group is one of RSPO’s flagships and a key supplier of CSPO.
Chan said while the RSPO issue appears to be a downside risk for the company, the research firm makes no changes to its earnings forecast for now, pending clarification.
To reflect the current crude palm oil (CPO) price upcycle, the research firm tweaked its price to earnings (PE) multiple for IOI Corp’s plantation business higher.
“If history is a guide, [the] rising CPO price trend tends to lead to higher valuation to IOI, given the strong correlation between PE and CPO price,” it added.
The research firm maintained its “Hold” call on IOI Corp with a higher target price of RM4.45, from RM4.15, based on a sum of parts valuation.