Moody’s upbeat on IOI outlook, riding on earnings’ growth, higher CPO prices

Moody's expects that the company will likely use the proceeds to acquire brownfield plantation estates in Malaysia. If IOI has not identified a suitable target, it can extend the time frame to complete an investment beyond the current extended time frame of December 2022.

KUALA LUMPUR: Moody’s Investors Service expects IOI Corporation Bhd’s leverage to decline due to stronger earnings growth amid high crude palm oil (CPO) prices and debt reduction.

In its report on Monday, it expects IOI's adjusted leverage -- as measured by adjusted debt/earnings before interest, tax, depreciation and amortisation (Ebitda) -- to decline to around 2.5 times over the next 12-18 months from 3.3 times for the fiscal year ended June 2021.

“This improvement will be driven by earnings growth amid high CPO prices and debt reduction of around RM400mil to RM500mil with cash on hand,” it said.

The rating agency said demand for IOI's palm oil products has remained solid despite thepandemic, and the company's operations have not been significantly disrupted by periodic movement control restrictions in Malaysia.

In addition, the high CPO price has boosted earnings at IOI's plantations segment in recent quarters, despite lower CPO production amid heavy rainfall and a decline in mature planted hectarage as older trees were replanted.

In the report, Moody’s affirmed the group’s Baa2 issuer rating, the Baa2 backed senior unsecured bond ratings of IOI Investment (L) Bhd, and the Baa2 backed senior unsecured bank credit facility rating of IOI Ventures (L) Bhd.

Moody's also affirmed the provisional (P)Baa2 backed senior unsecured rating on IOI Investment (L) Berhad's medium-term note (MTN) programme.

At the same time, Moody's has maintained the stable outlook on the ratings.

IOI Corp oil palm fruits

Maisam Hasnain, a Moody's vice president and senior analyst said: "The ratings affirmation reflects our expectation that IOI will maintain profitable operations while taking a prudent approach to investment and shareholder returns, such that they do not materially weaken the company's credit profile.”

Maisam said the proceeds from the proposed notes issuance will help IOI alleviate refinancing risk associated with its US$600mil notes due in June 2022, while allowing it to maintain strong liquidity.

The report pointed out IOI's Baa2 ratings reflect its established position as an efficient palm oil producer with integrated operations across the palm oil value chain, its track record of managing profitability through multiple commodity price cycles, and its ability to benefit from favorable long-term demand for palm oil.

Moody's also expects IOI to take a measured approach toward future investments such that its leverage does not exceed its downgrade trigger of 3.5 times.

The rating agency noted the company has utilised only 17% of the RM960mil it had earmarked for investments, from the RM3.8bil it had received in asset sale proceeds in 2018.

Moody's expects that the company will likely use the proceeds to acquire brownfield plantation estates in Malaysia. If IOI has not identified a suitable target, it can extend the time frame to complete an investment beyond the current extended time frame of December 2022.