Blue chip worth accumulating during CPO downcycle
Certainly, the big fall in crude palm oil (CPO) prices does not augur well for IOI Corp Bhd's earnings in FY2009 ending June 30 and maybe even FY2010.
This, however, does not mean the plantation giant is not worth looking at. Moreover, this is not the first downcycle IOI Corp has experienced — during a previous downcycle, the group had remained profitable even when CPO was trading below RM800 per tonne. CPO is now hovering between RM1,500 and RM1,600 a tonne.
No doubt, soft CPO prices have put the small oil palm planters in dire straits. But as one of the more efficient players in the industry — with low production costs — IOI Corp is capable of surviving the current downcycle.
Also, the group's extensive downstream activities will act as a hedge against poor earnings upstream. The weak CPO prices mean lower raw material costs for IOI Corp's speciality fat and oil production operations. Downstream activities are expected to be the key earnings driver for IOI Corp in the CPO downcycle.
The company's strong fundamentals have been overshadowed by current bearish sentiments. The group's foreign exchange (forex) losses are also a concern. IOI Corp announced a realised forex loss of RM100.6 million and unrealised forex loss of RM212.2 million in 2008. Some analysts anticipate more such losses due to the US dollar holding firm against the ringgit and euro.
These worries have depressed IOI Corp's share price, which fell more than 50% in 2008. The counter closed at RM3.58 on Dec 30, 2008.
The current share price may appear expensive amidst expectations of shrinking plantation earnings and the soft property market.
The group is unlikely to surpass its record high earnings per share of 38.65 sen posted in FY2008, but it will be the blue chip to accumulate should its share price weaken further. Being a leading player, IOI Corp's share price will be the first to surge when the next CPO upcycle comes, with investors willing to pay a premium for the stock.
