Monday, May 18, 2009

Further Clarifications On IOI Corp

Gamelion said...

I dont understand why all the bad news can be contained in one shot only & expect good news in future (nobody will be able to predict the future)???
Even if the company has sold 80% of its sales forward there is no guarantee that its customers will not be defaulting on their contracts if the CPO price may plunge in future .

Gamelion, Thats a good point. I don't know what to say to that. You are right, I am not so right.

solomon said...

Like Cramer, I prefer a micro view on IOI.

The only thing catch my eyes are the lower FFB production. Will this trend continue, could it still have revenue growth at the plantation sector for the next few quarters?

I am also of concerned with the contract default, I don't know how serious is this? Can this be absorbed by the downstream activities?

Longer term, other continents are on the rise in growing palm oil. Should they succeed, could this threaten the company financials?

There had been defaults for sure, and every time when prices plunge, there are bound to be defaults, because the situation "allows" them to default. IOI has stated that it has required smaller buyers now to put up bankers guarantee. The company will lose some business because of that because smaller sellers may not require that. Sometimes companies can only operate alongside what the majority are doing, if not, they risk losing business. In CPO, you can have the edge in production and yield management, but after it becomes a finished product, its a commodity, your palm oil is no different from those bought from a competitor. Hence if you put up "safeguards", it will affect your business. Lower production may have to do with better yield management in light of weaker prices. You can delay "harvesting" somewhat and manage your plantations to some degree. Hence lower production should not be a major cause for concern.

There will always be new competitors. Its the same for all commodities. When oil prices shoot up, there are plenty of new drilling and exploration, and even new technologies being used. We have to be clear that palm oil is still much cheaper than most alternatives, and still being unfairly painted as it is certainly a healthier alternative to most substitutes. We also have to know that it need temperate climate, and we are really do not have vast tracts of land left. You need a huge land base to have strong economies of scale, what you don't want is many small plantations scattered everywhere. In many areas, oil palm favours large players and established players with upstream and downstream businesses.

sam chong said...

If currency other than RM and Euro is used in the inter-co sales and purchases, by right one party's loss is another party's gain, so the group should be neutral. Combining the plantation and the resource-based, the margin dropped from 16% to 12 at a time when the CPO price realised was higher than last year 2900 vs 2700. ??

Currency losses can never be avoided, they can only be mitigated. IOI's losses is a concern as it speaks volumes on their hedging activity, registering those losses as a percentage of revenue basically implies that management takes a certain view on certain currencies. Investors do not want that. Investors want to buy a CPO producer and a good one at that, currency management expertise is not part of the deal. IOI management should eliminate that from their management purview.

p/s photo: Meisa Kuroki


solomon said...

Yup, they should be pure plantation company, and should not involved too much in currencies hedging and share repurchase (shoring up EPS??) activities.

For the 9 month results, can you explain more on the net changes in working capital (where is the RM900mil short term fund derived from)and taxes paid (less sales but more tax)?

David said...

IOI has the potential to be the best plantation counter in Malaysia due to its plantations in Sabah. When its owner/managers try to become too smart and perhaps too greedy, we have these currency losses which probably happened when they speculated on certain currencies. The lesson is to stick to what you know. Terrible performance for the 31/3 quarter.