PIVB Research ups IOI Corp target price to RM4.78

KUALA LUMPUR: PublicInvest Research (PIVB) Research has raised the 12 month target price for IOI Corporation Bhd to RM4.78 from RM4.55 after the Roundable of Sustainable Palm Oil (RSPO) lifted the suspension from Monday after four months. 

“We welcome the decision, however, it is going to take time for IOI Corp to recover lost customer base. Nevertheless, we expect its earnings to gradually improve going forward,” it said on Monday.

The research house said with the withdrawal of RSPO membership suspension, it adjusted its earnings forecasts to the pre-suspension level.

This will see its sum-of-part based target price enhanced from RM4.55 to RM4.78. Maintain Neutral call.

IOI Corp’s RSPO membership was suspended on March 28 due to non-compliance with some of RSPO’s rules on possessing environment permits and clearing of fragile land in Indonesia’s West Kalimantan province. 

Following that, its major customers, namely, Unilever, Colgate-Palmolive, Hershey’s, Johnson & Johnson, Kellogg, Mars, Nestle, SC Johson, Yum! Brands, Procter & Gamble and Rectitt Benckiser have stopped sourcing palm oil products from IOI Corp’s subsidiary, IOI Loders Croklaan and switched their suppliers to counterparts like KLK, Sime Darby and Wilmar. 

“This resulted in monetary losses like CSPO premium and customer base. Other non-monetary losses include reputation.

“IOI Corp reported total fresh fruit bunches (FFB) production of 3.14 million tonnes of FFB, which accounted for 97% of our full-year forecasts. The 4Q production had the steepest decline due to the strong El Nino’s impact. Nevertheless, we expect production growth to turn positive in the 2H 2016 as June production’s decline has softened significantly.

“IOI Corp is expected to announce its 4QFY16 results on 23 Aug. We think the results may be dragged by weaker FFB production and FX translation loss as our Ringgit weakened 3.8995 to 4.0288 against the US dollar. 4Q suffered the steepest production drop, down 171,012mt or 19.2% YoY.

“Reversing our earnings forecasts to the pre-suspension level. Following the withdrawal of suspension, we input higher earnings forecasts for FY17-19 with an increase of 3-5%. 

“Although it will be a major challenge for the Group to win back its lost customers, we believe its strong profile coupled with its sizeable downstream capacity would help to re-establish its tainted value chain in the medium term,” it said.