IOI still the top pick despite recent hedging losses

Tuesday October 28, 2008
By DANNY YAP

PETALING JAYA: IOI Corp Bhd, Malaysia’s second largest plantation company, remains the top pick among analysts for the sector despite its recent losses from hedging of palm oil purchases in euro.

Citi Investment Research analyst Penny Yaw, who rates IOI a buy/low risk stock with a target price of RM7.46, said it was still the most efficient oil palm plantation company with a yield per mature hectare of 28.54 tonnes.

“This is the highest yield per mature hectare for the industry,” she said, adding that the research house believed the current downward pressure in crude palm oil (CPO) price was short-term and the price was close to floor level.

Last Friday, CPO price fell RM160 to close at RM1,390 per tonne amid growing fears of a global recession slowing down demand.

The last time CPO price hit such a low level was in the early 1980s, when it dropped to RM1,444 per tonne.

Most analysts believe the current fundamentals warrant a minimum CPO price of RM1,300 to RM1,400 per tonne for the industry players, especially the smaller ones, to survive.
However, Yaw said, based on the underlying long-term fundamentals for vegetable oils over the medium term, the outlook remained positive for IOI due to its size and efficiency.

“The company also has a strong record of re-investing its capital and it enjoys the highest return on equity among the big-cap plantation groups in Malaysia,” she said, adding that IOI’s financial position was strengthening due to its strong operating cash flow.

TA Securities analyst James Ratnam concurred with Yaw that IOI’s overall performance outlook remained good, describing the recent fall in its share price as a knee-jerk reaction following the company’s hedging losses.

Last Friday, IOI’s share price fell as low as RM2.40 and closed at RM2.45, representing the lowest closing price since September 1998.

Ratnam said IOI’s overall earnings were unlikely to be seriously dented by the foreign exchange (forex) losses in the longer term.

For the financial year ended June 30, IOI announced unrecognised losses from currency options contracts of RM61.78mil, of which RM59.3mil was from sales contracts.

A foreign analyst said making losses or gains on forward currency contracts was a normal course of events for many large companies, including IOI.

“The forex losses are not a reflection of IOI’s core business competency, which is efficient CPO production,” he said.

He added that investors’ jitters due to the massive fall in CPO prices over the past months were exarcebated by the forex losses.

The analyst said the cost of production was between RM1,200 and RM1,700 for most plantation companies.

“If the CPO price hits RM1,200 per tonne, the earnings capability of all the plantation companies, including IOI, will be affected significantly as will their contribution to the country’s economy,” he said.

However, he said, IOI was probably in a better position than other plantation players to weather the storm if the CPO price dipped further.