IOI’s resolution of Ketapang case to have limited earnings impact
KUCHING: IOI Corporation Bhd’s (IOI) resolution of the Ketapang complaint case is expected by analysts to have limited earnings impact to the group.
In a filing on Bursa Malaysia last week,bothIOIandAidenvironment jointly declared to have achieved agreement in closing the Ketapang complaint case.
The joint statement highlighted that in line with the instruction issued by the Ministry of Environment and Forestry of Indonesia ( KLHK), IOI’s Indonesian subsidiary PT BNS will immediately abandon the 434 hectares until such a time as there are new Ministerial indstructions regarding the said land.
The statement went on to say that although IOI will certify PT BNS and SKS under the Roundtable on Sustainable Oil ( RSPO) time- bound plan, IOI undertakes not to market the palm oil produced from PT BNS and the affected areas of PT SKS with the RSPO certification claims for the duration of one planting cycle.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) believed that the resolution of the complaint will have limited earnings impact on the group as the abandoned area is relatively minimal (circa 1.5 per cent of Indonesian planted area), while the agreement to not market palm oil production in the area under RSPO should have little earnings impact as the area remains fairly young (less than seven years) with limited contribution to the group.
“Nevertheless, the friendly resolution of this complaint should soothe investors’ concerns on IOI’s sustainability commitment and improve buyers’ confidence in the company,” Kenanga Research said.
The research arm expected to see better downstream segment performance in the second half of current year 2017 (2HCY17), as more clients return to IOI on the conclusion of supply contracts with other competitors.
As Kenanga Research expected little earnings impact from the abandoned 434 hectares at PT BNS, the research arm thus maintained finacial year 2017-2018 estimate (FY17-18E) core net profit (CNP) at RM1.08 billion to RM1.3 billion.
Kenanga Research upgraded its call on IOI to ‘outperform’ (from ‘market perform’) as the research arm upgraded its target price to RM5.04 per share (from RM4.60 per share) based on a higher Fwd. price earnings ratio (PER) of 27fold (from 25-fold) on receding sustainability risk.
The research arm’s Fwd. PER was increased as it raised its valuation basis to mean valuation, from -0.5 standard deviation (SD) basis.
“We think this is fair as the complaint resolution should ease risks of future suspension,” Kenanga Research said.
The research arm added that operationally, the expected FY1718E fresh fruit bunch ( FFB) growth at six to seven per cent was generally in line with the CY16-17E sector average between one to nine per cent.