Negative impact from IOI’s RSPO suspension unlikely to be reversed immediately

KUCHING: While IOI Corporation Bhd’s (IOI) Roundtable on Sustainable Palm Oil (RSPO) recertification will be positive for the group, RHB Research Insitute Sdn Bhd (RHB Research) does not expect the negative impact from the suspension to be reversed immediately.

According to RHB Research, assuming the suspension is lifted by end- third quarter ( 3Q), it would mean that there would only be a six-month impact on IOI’s earnings.

“While this would have an immediate positive impact on earnings for the upstream division – as IOI would be able to sell its certified sustainable palm oil (CSPO) again – the impact to the downstream division may take a longer time.

“This is due to the fact that downstream customers, who have already severed contracts with IOI may have found other suppliers already, or may take a longer time to trust IOI again.

“The verification processes conducted by the downstream customers to ensure sustainability criteria are met may take a longer period.

“This could result in IOI not being able to regain this portion of its downstream business for an additional few months,” the research house said.

The research house has already imputed the RSPO suspension impact into its forecasts for financial year 2016 (FY16) (June) (three months) and FY17 (whole year), estimating the FY17 full year impact to be a reduction of nine to 10 per cent of earnings.

On IOI’s fresh fruit bunch output, RHB Resesarch noted that in FY16, the group recorded FFB output decline of 11.2 per cent year on year (y-o-y), which was slightly greater than the research house’s projected 10 per cent decline.

“IOI expects the impact of El Nino to have abated by 3Q16 or 4Q16, expecting its FFB output to recover in FY17 to a growth of above 10 per cent y-o-y.

“Rains have already resumed at its estates in Sabah and recovery is underway,” RHB Reserch said.

The research house’s FFB growth forecast for FY17 is 5.4 per cent, which it maintained for now, to be conservative.

RHB Research also noted that IOI achieved an average crude palm oil (CPO) cost of around RM1,400 per tonne ( excluding kernel credit) in the first nine months of 2016 (9M16), which is an estimated five to 10 per cent higher year on year (y-o-y).

“It expects the average CPO cost for the rest of the financial year, as well as FY17, to be similar, given that the higher wage costs would be offset by lower fertiliser costs.

“As this is higher than our forecasts, we adjust our cost assumptions upwards for FY1618,” the research house said.

Meanwh i l e, under the manufacturing division, RHB Research noted that IOI’s refining and oleochemical divisions are running at utilisation rates of 75-80 per cent, while the specialty fats division is running at 50-60 per cent.

“Currently, all three divisions are profitable, although the refinery division’s profit is partly attributable to trading profits,” it said.