RSPO suspension may see IOI customers switch to other suppliers

  • Business
  • Wednesday, 23 Mar 2016

The palm oil contract for June delivery on the Bursa Malaysia Derivatives Exchange fell 1.1 percent to reach 2,639 ringgit ($681) per tonne at the closing trade. Traded volumes were 43,083 lots of 25 tonnes each, versus a 2015 daily average of 44,600 lots

PETALING JAYA: A possible suspension of IOI Corp Bhd’s Roundtable on Sustainable Palm Oil (RSPO) certification could see the plantation giant’s customers switching to other suppliers to comply with their sustainability policies.

Hong Leong Investment Bank (HLIB) Research said this was a potential downside risk, as the group’s downstream operations would be hit.

The research house was commenting on a Bloomberg report which stated that RSPO’s complaint panel had recommended that IOI’s certification be temporarily suspended for alleged non-compliance.

“Its customers, especially those in the European Union and the United States, might switch to other suppliers in order to comply with their sustainability policies.

“IOI’s downstream operation accounted for about 30% of its total financial year 2015 operating profit,” it said.

The RSPO’s decision is expected in the next few weeks.

If suspended, IOI’s products would no longer be certified as “sustainable”.

RSPO had reportedly, in a letter to IOI on March 14, said that the group had breached RSPO principles on environmental permits and allegedly cleared more land than authorised in certain plantations in Indonesia.

“We understand that IOI will submit its action plan to RSPO within the next two weeks.

“It is also seeking clarification on the scope of suspension, whether it applies to the group as a whole or is only applicable to the certification of new developments,” added the research house in a note yesterday.

HLIB Research has maintained a “hold” on the group, with a higher target price of RM4.45, and said it was not changing its earnings forecast for now, pending clarification.

“To reflect the current crude palm oil (CPO) price upcycle, we tweak our price earnings (PE) multiple for the plantation business higher.

“If history is a guide, then the rising CPO price trend tends to lead to higher valuations of IOI, given the strong correlation between PE and the CPO price,” it added.

An official from IOI told Bloomberg that it expects to submit an action plan to the RSPO within the given deadline of two weeks.

The group’s sustainability senior manager Yeo Lee Nya was quoted as saying that she believes the matter would be resolved without any adverse impact on IOI.

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