In a joint statement, IOICORP and Aidenvironment agreed to close the Ketapang complaint case after settling on IOICORP’s overplanting, planting procedure and RSPO certification claims at its PT BNS area. We are positive as it eases IOICORP’s reputational risk which should lead to better downstream recovery over the medium-long term. Upgrade call to OUTPERFORM with higher TP of RM5.04 on higher Fwd. PER of 27.0x.

New year’s resolution. In a joint statement, IOI Corporation Berhad (IOICORP) and Aidenvironment have agreed to close the latter’s complaint case after resolving IOICORP’s Indonesian subsidiary, PT BNS’s overplanting, New Planting Procedure, and RSPO certification claims. We gather that effective immediately, IOICORP will abandon 434 ha of cleared and planted area which was verified to overlap with forestry land until there are new Ministerial instructions. IOICORP also agreed that while it will continue to certify PT BNS and PT SKS under RSPO’s time-bound plan, but will not market palm oil produced in the affected area (PT BNS and part of PT SKS) with RSPO Certification claims for one planting cycle (20-25 years).

Neutral earnings impact; positive for sentiment. We believe that the resolution of the complaint will have limited earnings impact on IOICORP as the abandoned area is relatively minimal (c.1.5% of Indonesian planted area), while the agreement to not market palm oil production in the area under RSPO should have little earnings impact as the area remains fairly young (<7 years) with limited contribution to the group. Nevertheless, the friendly resolution of this complaint should soothe investors’ concerns on IOICORP’s sustainability commitment and improve buyers’ confidence in the company. We expect to see better downstream segment performance in 2HCY17, as more clients return to IOICORP on the conclusion of supply contracts with other competitors.

Maintain FY17-18E CNP at RM1.08-1.30b as we expect little earnings impact from the abandoned 434 ha at PT BNS.

Upgrade to OUTPERFORM with higher TP of RM5.04. We upgrade our call to OUTPERFORM (from MARKET PERFORM) as we upgrade our TP to RM5.04 (from RM4.60) based on a higher Fwd. PER of 27.0x (from 25.0x) on receding sustainability risk. Our Fwd. PER is increased as we raise our valuation basis to mean valuation, from -0.5SD basis. We think this is fair as the complaint resolution should ease risks of future suspension. Operationally, the expected FY17-18E FFB growth at 6-7% is generally in line with the CY16-17E sector average of +1-9%.

Source: Kenanga Research - 05 Dec 2016