Highlights

• RSPO Board of Governors has decided to suspend IOI Corporation’s RSPO certification for the entire IOI Group until action plan has been submitted and accepted by RSPO and Peer Review of the HCV assessments has been performed.

• To recap, RSPO's Complaint Panel has recommended RSPO certification suspension for IOI due to allege of noncompliance with some of RSPO’s rules on possessing environmental permits and clearing fragile land in Indonesia.

Comment

• IOI's management indicated that the impact of temporary suspension of RSPO certification would be minimal as premium for certified sustainable palm oil (CSPO) only accounts less than 0.5% of its total revenue. Besides, its existing inventory of CSPO will not be impacted and would continue to be sold as CSPO.

• Although the financial impact is minimal, the impact on its reputation is hard to quantify especially to its customer base in Europe and USA. Europe and America accounted about 51% of its FY15 revenue.

• IOI has submitted a detailed and comprehensive action plan to RSPO and believes that the measures are reasonable and sufficient to resolve the issues.

Risks

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

Forecasts

• No change to our earnings forecast. Nevertheless, we lowered the PE multiple for its downstream operation to reflect the potential reputation impact.

Rating

HOLD

Positives

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

Negatives

• (1) Pricey valuations.

Valuation

We maintain HOLD on IOI with lower target price of RM4.30 (previous TP of RM4.45) based on SOP valuation.

Source: Hong Leong Investment Bank Research - 28 Mar 2016