IOI Corp needs time to regain lost ground

PETALING JAYA: The Roundtable of Sustainable Palm Oil’s (RSPO) decision to lift the suspension on IOI Corp Bhd yesterday is positive news for the company but it may take time to recover lost customer base, said PublicInvest Research.
Following the suspension of its RSPO membership on March 28 due to non-compliance issues, IOI Corp’s major customers stopped sourcing palm oil products from IOI subsidiary IOI Loders Croklaan and switched to suppliers like KLK, Sime Darby and Wilmar. The major customers include Unilever, Colgate-Palmolive, Hershey’s, Johnson & Johnson, Kellogg, Mars, Nestle, SC Johnson, Yum! Brands, Procter & Gamble and Reckitt Benckiser.
“This resulted in monetary losses like CSPO premium and customer base. Other non-monetary losses include reputation,” PublicInvest Research said in its report yesterday.
“Following the withdrawal of suspension, we input higher earnings forecasts for FY17-19 with an increase of 3-5%. Although it will be a major challenge for the group to win back its lost customers, we believe its strong profile coupled with its sizeable downstream capacity would help to re-establish its tainted value chain in the medium term,” it said.
The firm maintained its “neutral” call on the stock and increased its target price to RM4.78 from RM4.55.
It said that IOI Corp is likely to see lacklustre results in 4QFY16, dragged by weaker fresh fruit bunch (FFB) production and foreign exchange translation loss. The fourth quarter suffered the steepest production drop, down 171,012 tonnes or 19.2% year-on-year.
“Fourth quarter production had the steepest decline due to the strong El Nino impact. Nevertheless, we expect production growth to turn positive in 2H2016 as June production’s decline has softened significantly,” it said.
Meanwhile, MIDF Research said the earlier-than-expected lifting of the suspension will be positive for the company’s share price.
“The uplift is not a surprise as we have written in our report dated June 7 that we believe IOI Corp’s suspension may be lifted in less than a year given its proactive stance. However, the speed of the uplift has surprised us. All in, the suspension has been ongoing for only less than five months,” it said in its report yesterday.
It maintained its “buy” call with a higher target price of RM5.15 and maintained its FY16 and FY17 earnings estimate of RM1.32 billion and RM1.47 billion respectively.
“We like IOI Corp due to the positive sentiment resulting from the news, good earnings with 9MFY16 core earnings up 25% to RM1.14 billion and it is the most liquid proxy to the Malaysia plantation sector to ride the CPO price uptrend,” it added.
Maybank IB Research said in its note that the move by RSPO will help contain losses, which would have otherwise dragged on with a prolonged suspension.
During a recent meeting with the company, the management said that the financial impact from the RSPO suspension were felt since June as it had about one to 1½ months of CSPO stock reserves as at the date of its suspension.
It maintained its “hold” call with a higher target price of RM4.30 and restored its FY17-18F core net profit forecasts by 7% and 4% growth respectively.
It expects IOI Corp’s 4QFY16 earnings to be back in the red or barely break even due to the foreign exchange translation losses of RM140 million from its US dollar debt exposure.