Saturday, May 16, 2009

IOI's Strategic Shuffling Of Results

IOI Corp Bhd posted a 93.8% drop in net profit to RM37.36mil in the third quarter of its financial year ending June 30, compared with RM601.64mil in the corresponding period last year. The decline was mainly due to unrealised forex losses and lower contribution from its manufacturing and property business.

The company’s revenue dropped 12.2% to RM3.096bil in the third quarter compared with RM3.525bil a year earlier. Earnings per share was 0.63 sen versus 9.89 sen previously. The company declared a dividend of three sen for the quarter. IOI Corp said overall, the group’s results for the current financial year were expected to be lower than the previous year’s record but still satisfactory in the light of current conditions.

In a filing with Bursa Malaysia yesterday, the company said its plantation segment reported a 6% increase in operating profit to RM1.38bil for the nine months of the current financial year, compared with RM1.3bil in the same period a year ago. “The better performance is due mainly to higher CPO prices realised from the forward sales entered into during the second half of financial year 2008,” the company said. Its resource-based manufacturing operating profit was significantly lower at RM169.1mil for the nine months of the current financial year compared with RM457.4mil in the same period last year.

“The lower profit is attributable mainly to realised foreign exchange losses and customer defaults on high priced contracts incurred during the first half of the financial year and lower sales volume due to the unfavourable global economic conditions,” the company said. The property segment’s operating profit of RM200.5mil for the nine months of the current financial year was 35% lower than in the same period last year. It added that the decrease was mainly due to the soft property market conditions and lower margins.

Overview - The principal activities of IOICORP consist of investment holding and the cultivation of oil palm and processing of palm oil. The principal activities of the subsidiaries are cultivation of oil palm, processing of palm oil, trading in commodities, property development, property investment and investment holding.
Oil palm plantation is one of IOICORP's core businesses as it contributes over 40% to the company's profit. IOICORP manages about 100,000 ha of oil palm plantation with approximately 65% of the plantation in Sabah and the rest in the peninsular.
The company also owns ten crude palm oil mills to produce crude palm oil and palm kennel. Through its 65% owned subsidiary, IOI Properties Berhad, IOICORP is involved in property development and investment, which is another major profit contributor to the company. The company has undertaken several mixed development township projects, which include Bandar Puchong Jaya and Bandar Puteri Puchong in the Klang Valley and Bandar Putra Senai in Johor Bahru. In addition, IOICORP owns 1.7mn sq ft of lettable retail and office space. Meanwhile, the company is also involved in the manufacture and trading of fatty acids, glycerine, soap noodles and metallic stearates through its 59% owned subsidiary Palmco Holdings Berhad.

Ratings Downgrade - Moody's Investors Service has changed IOI Corporation Bhd's outlook to negative from stable for its Baa1 issuer rating. At the same time, the outlook for the Baa1 senior unsecured bonds and loans issued by IOI Ventures (L) Bhd, which are guaranteed by IOI, have been revised to negative from stable. "The rating action has been driven by IOI's recently reported weaker profitability which is mainly the result of higher than expected foreign exchange losses and customer defaults amid declining crude palm oil prices," said a Moody's Vice President.

"These losses have prompted Moody's concerns over weakness in the company's internal management system especially in effectively controlling its foreign exchange exposure. In addition, the outlook for IOI's two major business lines --- resource based manufacturing and real estate development -- are expected to remain challenging over the next 12 months which may continue to pressure its profitability," he said.

IOI's current ratings are supported by the favourable long-term outlook for palm oil demand; position as a global top-tier palm oil producer and efficient operations; good access to capital and bank markets as well as the management's good track record in managing the palm oil business throughout the business cycle. IOI's strong liquidity is also supportive of its current rating.

Downgrade pressure on IOI could emerge if pressure on its downstream operation margin continues resulting in protracted weakness in profitability, such that earnings before interest, tax, depreciation and amortisation (EBITDA) margin remains below 19 percent; and weaker palm oil production from some of its aging plantations results in a material reduction in the profitability of its plantation segment, Moody's said.

The outlook could return to stable if IOI can demonstrate effective internal measures to minimize its foreign exchange risks and bad debt losses, as well as generate positive free cash flow to reduce its debt leverage such that its Debt/EBITDA is not exceeding 2.5-2.75 times. The last rating action with regard to IOI was taken on Dec 2, 2008, when the company's issuer and debt ratings were downgraded from A3 to Baa1.

Verdict: No big deal. The stock is still some 40% off its 12 month high. Its a good sign that they are whacking all the losses onto this quarter. This will get rid of all the bad news in one shot. Expect a good showing in the coming quarters. Operations wise the company has already sold forward 80% of its FY09 CPO production at an average price of RM2,700 (till June 2009). Now they are selling FY2010 production but the company seems to think that there is a good chance that they can get RM3,000 in 2H of 2009. Operating cost is still just RM1,100 and may actually average closer to RM1,000 for the rest of the year. This represents a good pick up level.

p/s photo: Suzanne Sae


RAD said...

Dear Dali
Is it possible for you to do a similar write-up on Pelikan?

At one time the stock was trading at RM5,I think, and now at RM0.95

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 .

cayote said...

Dear Sir,

I look forward for your commment (rejoice?) at Temasek $4bil losses in B of A.

"It grieves me to see what Singapore is doing. They are going to lose money," he added, referring to investments by Government of Singapore Investment Corp and Temasek [TEM.UL] in Citigroup (C.N), Switzerland's UBS (UBSN.VX) and Merrill Lynch MER.N." - JIM ROGERS

- Reuters 5 March

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?

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. ??

jitseng said...

The co has utilised 1.6bn to buy back theirs shares.This buy has only reduce the paid by a frection yet it will incured a lot interest as the total debts around 6bn.