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NEUTRAL STANCE: Market observers are neutral on the move taken by IOI Corp in terminating its proposed acquisition of oil palm plantation land from Dutaland. Although the move is not met with much criticism, analysts are however cautious of the group’s FFB yield going forward.

KUCHING: IOI Corporation’s Bhd (IOI Corp) may see a dip in fresh fruit bunch (FFB) yields following its decision to terminate the proposed acquisition of 11,977.91 hectares (ha) of oil palm plantation land from Dutaland Bhd (Dutaland).

To recap IOI Corp’s unit, Sri Mayvin Plantation Sdn Bhd (Sri Mayvin) had previously signed a sales and purchase agreement (SPA) worth RM830 million with Dutaland’s unit Pertama Land and Development Sdn Bhd (Pertama Land and Development) for the land on July 28 this year.

According to researchers at Kenanga Investment Bank Bhd (Kenanga Research), the acquisition back then was premised on IOI Corp’s aim of increasing its group’s plantation landbank by 6.69 per cent to 190,862ha from its current 178,884 ha in the country.

Nevertheless, the group had called off the acquisition of this land on October 25, citing the reason as ‘due to non-compliance of certain terms and conditions’. Dutaland at the time rejected the reasons for the termination of the SPA and directed the trustee of the deal not to remit the 10 per cent deposit of RM83 million.
However, both group had later on  decided to release both parties from any obligations and liabilities arising from the previous SPA. IOI Corp had avoided the risk of its RM83 million deposit being forfeited, which otherwise would have caused a four per cent downside to its financial year 2012 estimates (FY12E) earnings.

Although IOI Corp managed  to dodge its losses, market observers were less upbeat on the group’s performance going forward. Kenanga Research believed that the cancellation of the oil palm plantation land purchase might limit the group’s long term FFB production growth.

“In financial year 2011, IOI Corp’s FFB yield had seen a shrink for the third consecutive years as it registered only 3.3 million metric tonne (mt).

“This is similar to a 3.2 per cent decline experienced on a year-on-year basis. We opine this may be caused by its oil palm age profile which had passed its peak production stage,” said the analyst.

The declining FFB volume was attributed mainly to adverse weather caused by La Nina in the first quarter of this year. This had put a downward pressure on its FFB output for financial year ending June 30 this year.

It was reported that the company’s total planted area of the plantation land was at an estimated 10,449ha whereby 85 per cent of the estate was standing at its prime with its oil palm tree ranging  at about three years to 15 years.

Taking a similar stance was an analyst from ECM Libra Research Sdn Bhd who highlighted that the group’s decision to terminate the land acquisition would place it in an unfavourable position as it was already losing out on further FFB yield.

“It has been a known fact that the termination will result in a loss of potential FFB yield as a large portion of its trees are already at its peak.

“It is still early to affirm whether the group is looking at increasing its land bank elsewhere but it will continue to replant on their existing landbank. They have been doing this for the past two to three years,” said the analyst in a phone interview.

On whether she considered the move to be wise, the analyst opined that it was just a matter of non-compliance that would relieve the company from further inconvenience in the long-run.

Kenanga Research were also neutral on the news and had adjusted both its FY12 to FY13E earnings upwards by two per cent to three per cent to RM2.16 billion. This was after applying new FY12E to FY13E sales growth of 10 per cent to three per cent from the property development and property investment segments respectively.

The research firm had also increased its forward price earnings ratio (PER) slightly to 12.6 times after updating its historical five-year forward PER to capture the October prices.

“We are maintaining a cautious outlook on crude palm oil (CPO) prices as the prolonged economic uncertainty in Europe may cause CPO prices to trade below RM3,000 per mt in calendar year 2012,” said the Kenanga Research analyst.