Highlights

• IOI has filed a challenge proceeding with Justice of Peace in Zurich, Switzerland against the decision made by RSPO Board of Governor to suspend IOI's RSPO certificates.

Comment

• To recap, RSPO Board of Governors has decided to suspend IOI Corporation’s RSPO certification for the entire IOI Group from 1 Apr onwards until action plan has been submitted and accepted by RSPO and Peer Review of the HCV assessments has been performed.

• According to IOI's statement, a conciliatory hearing will be held before the Justice of Peace who will be mediate between both parties. The Justice of Peace will grant IOI authorisation to proceed with a formal legal action against RSPO, to be filed at the District Court in Zurich only if the parties are unable to reach agreement during the conciliation proceedings.

• At the same time, IOI will continue to focus on actions required to lift the RSPO membership suspension. It has revised its action plan after consultation with NGOs. While IOI hopes it could resolve the issue within a few months but we believe that the suspension could drag on as it takes a long time to get the issues resolved.

Risks

• Downside:
  • Weaker-than-expected FFB output;
  • Escalating CPO production cost; and
  • Weaker-than-expected recovery in edible oil demand and prices.
  • Prolonged RSPO certificate suspension.

Forecasts

• No change to our earnings forecast. We had previously lowered the PE multiple for its downstream operation to reflect the potential reputation impact from RSPO suspension.

Rating

HOLD

Positives

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

Negatives

• (1) Pricey valuations.

Valuation

We maintain HOLD on IOI for now with target price of RM4.30 based on SOP valuation pending outcome of the challenge proceeding.

Source: Hong Leong Investment Bank Research - 10 May 2016