IOI Corporation: Customers and Investors Want Sustainability

In Q1 2016, IOI Corporation’s (IOI:MK) stock price rose to a year-to-date high of MYR 5.00. In February 2016, Chain Reaction Research published a report warning that IOI’s equity value might collapse given Chain Reaction Research’s forecast that the Roundtable on Sustainable Palm Oil (RSPO) might suspend IOI shortly thereafter. In March 2016 RSPO temporarily suspended IOI due to its clearing of forests in violation of RSPO’s policy. As forecasted, by May 2016, IOI’s shares fell 18% to MYR 4.12 while IOI lost 26 major corporate customers. Separately, IOI announced it would sue the RSPO of which it is a voluntary member. Finally, by mid-May 2016, analysts’ negative recommendations peaked and Moody’s reviewed IOI’s debt for a downgrade.

Appreciating these clear market signals, IOI changed its approach. On June 6th, 2016, IOI withdrew its lawsuit against RSPO and announced it would focus on improving its sustainability profile to achieve customers’ No Deforestation, No Peat, No Exploitation (NDPE) commitments and zero-deforestation polices. In doing so, IOI announced it would strive to achieve a more stringent RSPO Next certification by Q4 2016. Shortly afterwards IOI’s equity price gained 6% reaching MYR 4.38 by July 11, 2016.

Key Findings

  • IOI stated in June 2016 it would implement RSPO Next certification by Q4 2016. Meanwhile, IOI needs to resolve its pending RSPO complaints.
  • 26 customers suspended contracts because of IOI’s RSPO noncompliance.
  • IOI’s RSPO suspension may drag on, further suppressing IOI’s equity value.
  • In response to IOI’s share price collapse because of the RSPO suspension, IOI conducted 10 share repurchase programs.
  • IOI experienced equity volatility five times between 2011 to 2015 due to landbank and RSPO concerns.
  • IOI’s forward PE and PB ratios are expected to be above peers.

As shown in Figure 1, IOI’s decision to drop its lawsuit against RSPO and to come into compliance with customers’ NDPE polices, as well as its statement that it wants to achieve the RSPO Next certification by Q4 2016, are positive signs that IOI may be supporting its higher-margin CSPO business line – allowing for equity price recovery. At the same time, IOI still has one major RSPO complaints pending.

In summary, IOI’s RSPO suspension is likely to result in lost revenue and reduced operating earnings, continued equity price downdrafts and reputational damage. To demonstrate that IOI understands its market and customers’ concerns, the company may want to focus on achieving RSPO compliance and RSPO Next certification and establishing stringent operational risk controls that properly manage its landbank. Yet, questions remain regarding whether RSPO Next is operational. IOI may benefit from employing a robust operational risk management framework built on sustainability, so as to demonstrate to investors the seriousness with which it takes its current RSPO suspension and its possible palm oil revenue at risk. Simply put, IOI cannot move forward without resolving its RSPO cases first.

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