We are turning more optimistic on IOI Corporation (IOICORP) as the company has submitted its action plan and Peer Reviewed HCV assessments to RSPO for approval. It has also withdrawn the challenge proceedings against the suspension filed in Zurich, which we take as commitment to resolve the suspension via RSPO’s internal process. Nevertheless, the long-term reputational and clientele impact of its earlier actions remains uncertain. We upgrade our call to MARKET PERFORM with a higher TP of RM4.57 as we upgrade our valuation basis to -0.5SD (from -1.5SD).

Awaiting approval of Action Plan. On 1st Jun 2016, IOICORP submitted its quarterly progress report to the RSPO Board of Governors which was endorsed by its Board of Directors as requested by RSPO. IOICORP also submitted its new IOI Group Sustainability Resources Allocation and Policy Initiatives. We gather from its progress report that the company has submitted most of the documents requested by RSPO, with the exception of a clarification letter from the Indonesian Forestry Services (by mid-June), feedback from Aidenvironment, and Land Use Change (LUC) analysis (by mid-June). Based on the RSPO Complaints Panel, the recommended suspension period for IOICORP is “at least until such time as the above action plan has been submitted and accepted by RSPO, and until the Peer Reviews of the HCV assessments have been performed”. With the submission of the action plan, progress report and peer reviewed HCV assessments, we believe the ball is now in RSPO’s court on whether to accept the action plan and thereby lift IOICORP’s suspension.

Withdrawing its challenge. Subsequently, on 6th Jun 2016, IOICORP withdrew the challenge proceedings (filed 9-May-16) against RSPO’s suspension in Zurich, Switzerland. Recall in Kenanga Today (dated 7th Jun 2016) in which we were slightly positive, as the announcement appears to be a sign of progress for the resolution of IOICORP’s suspension. We believe the withdrawal reflects IOICORP's commitment to resolve the suspension via RSPO's internal processes, which is likelier the speedier path.

Damage is done? We think the suspension will have a temporary negative impact to IOICORP’s earnings, namely loss of CSPO premium for the former, and reputational risk leading to loss of MNC clients for the latter. We understand that many of IOICORP’s MNC clients are based in Europe and America, which made up 51% of group revenue, and c.70% of its specialty fats revenue. Nevertheless, we expect IOICORP to partly recover its client base once the suspension is lifted. While we have reflected lower CSPO premiums in our FY16-17E earnings forecasts in our 3Q16 results report, we have not fully imputed the potential loss of business due to the high uncertainty.

Upgrade to MARKET PERFORM on shorter suspension outlook, with higher TP of RM4.57. With the submission of IOICORP’s action plan and withdrawal of its challenge proceedings, we are optimistic that IOICORP will be able to resolve its suspension by 1H17, dependent on the speed of response by RSPO and any further issues raised by the complainant (Aidenvironment). Hence, we upgrade our valuation basis to -0.5SD (from - 1.5SD) for an updated Fwd. PER of 23.7x (from 21.0x), applied to unchanged FY17E EPS of 19.3 sen for a higher TP of RM4.57 (from RM4.05). We also upgrade our call to MARKET PERFORM (from UNDERPERFORM). While we feel that the progress made in resolving the suspension will ease investors’ concerns, upside could be limited by temporary earnings risk and a negative FY16E FFB growth outlook (-2%, against the sector average of +1%).

Source: Kenanga Research - 10 Jun 2016