Risk temporary RSPO suspension

We downgrade IOI to HOLD (from BUY) given limited upside to our TP of MYR4.97 on 30x FY17 PER after the stock price has appreciated 15% since our upgrade call on 19 Jan 2016. A new uncertainty is potential financial losses (if any) if IOI’s RSPO membership is temporarily suspended in the coming weeks pending a decision by RSPO’s board of governors. Pending clarification, our earnings forecasts are unchanged; HOLD for now.

Allegedly breached RSPO principles & criteria

According to Bloomberg, the Roundtable on Sustainable Palm Oil (RSPO) complaints panel, in a letter dated 14 Mar, recommended to RSPO board of governors to temporarily suspend certification of IOI until an action plan is submitted and accepted, and peer reviews of High Conservation Value assessments performed. This follows complains that IOI breached Indonesia’s laws by not possessing environmental permits when clearing land and by clearing more than what was authorised, among others.

A big certified sustainable palm oil (CSPO) producer

IOI has 158,767 ha of certified area in Malaysia and an estimated CSPO production capacity of 0.75m MT (or 6% of global CPSO capacity). This capacity approximates 96% of IOI’s FY6/15 CPO output. In comparison, IOI sold 0.77m MT of specialty oils & fats, and 0.59m MT of oleo chemical in FY6/15. These downstream businesses use palm oil as key feedstocks.

Potential financial losses hard to quantify for now

We believe IOI will not deliberately run afoul of RSPO principles. Nonetheless a temporarily suspension may disrupt operations as we understand a group wide enforcement means that IOI cannot claim to produce or sell CSPO products during the suspension period. IOI has established EU customers and MNCs who may not view the suspension favourably even though IOI is also ISCC certified. Of IOI’s MYR11.6b revenue in FY6/15, 36% was derived from the EU and 15% from North America. Any potential financial losses are hard to quantify for now.

Source: Maybank Research - 21 Mar 2016