Highlights

• According to Bloomberg, RSPO Complaint Panel will recommend RSPO Board of Governors to suspend IOI Corporation’s RSPO certification until action plan has been submitted and accepted by RSPO and Peer Review of the HCV assessments has been performed.

• To recap, IOI was alleged for non-compliant with some of RSPO’s rules on possessing environmental permits, clearing fragile land in Indonesia.

Comment

• We view this as a potential downside risk to IOI 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. IOI’s downstream operation accounted for about 30% of its total FY15 operating profit.

• We understanding that IOI will submit its action plan to RSPO within the next two weeks. It is also seeking for 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 next few weeks.

Risks

• - downside
• Weaker-than-expected FFB output;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.
• RSPO certification suspension.

Forecasts

• While the RSPO issue appears to be a downside risk for the company, we make no change to our earnings forecast for now pending clarification.
• To reflect the current CPO price upcycle, we tweak our PE multiple for plantation business higher. If history is a guide, rising CPO price trend tends to lead to higher valuation to IOI, given the strong correlation between PE and CPO price.

Rating

HOLD

Positives

• (1) Decent balance sheet; and (2) Strong cash flow generation ability.

Negatives

• (1) Pricey valuations.

Valuation

Post adjustment to valuation parameter, we maintain HOLD on IOI with higher target price of RM4.45 (RM4.15) based on SOP valuation.

Source: Hong Leong Investment Bank Research - 22 Mar 2016