IOI Corporation Bhd

This post follows from my TDM Berhad’s post. I was chasing for profits in palm oil sector and realized that I played too safe by investing in Bumitama and First Resources only. So, in December 2016, I was searching to buy palm oil stocks that have not appreciated after the CPO price rally. TDM was the first one. IOI was the second one.

I bought IOI at 4.39 on 9 December 2016 and sold it at 4.70 on 14 February 2017. That’s 7% return in MYR in two months, but only 3.2% net return in SGD after fees and forex losses. Like what I mentioned in TDM’s post, I was expecting MYR to stabilize after a substantial fall in 2015-2016, but it continued to fall in 2017. The trading cost for Malaysia stocks and the bid-ask spread for SGD-MYR are also quite high, hurting my return.

Why IOI?

Well managed

IOI is one of Malaysia’s biggest conglomerates (top 20 largest companies in Malaysia). It manages oil palm plantations, producing palm oils, specialty fats and oleochemicals, and develop property in Malaysia and other countries. In late 2013/early 2014, IOI Corp spinned off its property division into a separately listed company, IOI Properties Group Bhd.

Its founder, Lee Shin Cheng, is fifth richest in Malaysia in 2016 with net worth of SGD 4.8bn. He earned a nickname “tree talker” as he would talk to the trees and request them to produce more fruits. The interesting thing is that the trees tend to obey.

IOI’s plantation is among the best managed in the industry. It has high FFB yield (above 23mt/ha in most years) and CPO yield (above 5mt/ha in most years). This could probably be the result of “tree talker” founder.

IOI - Plantation Stats - 2016.PNG

IOI - CPO Yield - 2016.PNG

Source: IOI Corp’s Annual Report 2016.

Stagnant Share Price

IOI’s share price became stagnant since mid of 2014 until now. CPO price also fell to RM 2200-2400/mt range during this period. The share price hit the low of 3.8 for a short period in Sept 2015 and reached the high of 5.0 briefly in April 2016. Market turned bullish with rising CPO price in Q3 of 2016 but IOI’s share price remained relatively flat. In November, it fell from 4.50 to 4.30.

IOI Corp - Share Price - 2015-2016.PNG

Opportunistic Trading

Like what I did with TDM Berhad, I took the opportunity to buy IOI during this low at 4.39 as it has not priced in the strong CPO rally at all. I don’t recommend buying and holding IOI for long term. My strategy here is opportunistic trading. The high CPO price will benefit IOI substantially, and I saw the stagnant share price as the opportunity to buy, so I took it.

In case this trade failed to achieve its objective, in normal case, IOI’s price stays stagnant and I can get out flat. In bad case, IOI’s share price might fall to its low of 4.0, like what happened in May 2016, but that is just 9% loss from my purchase price. This is low probability and the low price could last probably just for few months. If you don’t sell during temporary low price, you don’t suffer loss.

The higher probability (good case) is that it will hit higher price in coming months as the market gradually becomes happier with high CPO price. It is earnings release season, and the market will be happy with the strong growth in net profits from most, if not all, palm oil players. It reached the high of 5.0 in March 2016 when CPO price was high at that time, so that gave me confidence that IOI share price will rise. I was expecting 4.70-4.80 as exit price, which could generate 7-9% return in 2-3 months. The return is not high, but the probability is high.

You could argue that IOI’s P/E at 20x is very high. It’s not a value buy for palm oil stocks when the P/E is so high.  Yes, it’s true. But, you have to understand this. Large Malaysian palm oil players’ P/E are mostly high (18-23x) whether it’s good or bad time. They are also supported by state fund’s recurring purchase (EPF – Employees Providend Fund). Its P/E ratio was high in the past, is high now and likely to remain high in the future with state fund’s support. With current tailwinds of high CPO price, the probability that IOI get de-rated to low P/E is very small.

Trading fees, Weakening MYR and High bid-ask spread

My expectation for IOI trade is around 7-9% return in 2-3 months. I got 7% (in MYR) in 2 months. But the high trading costs (buy and sell) took away nearly 1.2%. What disappointed me was the further weakening of MYR. MYR weakened by another ~1.5% against SGD in 2 months. The high bid-ask SGD-MYR spread also hurt my return. All in all, my forex loss was around 2.3%, and I ended up getting 3.2% in net return (in SGD).

This is below my expectation, but I should be happy with 3.2% in a relatively short two months only. After all, among the palm oil producers, I chose a low risk one to trade. If I choose to trade Felda (low quality palm oil producers), I could get higher return, but must also bear higher risk.

Reason to sell

I think IOI could rally further to above 4.80, but I wasn’t sure about the SGD-MYR fluctuation. The market is forecasting further weakening of MYR.

The palm oil inventory fell to a low due to strong export, but I pay more attention to normalization of monthly production. MPOB reported palm oil production for Dec 2016 and Jan 2017 that were higher than the corresponding months in previous year. First Resources and Bumitama also started reporting higher production in the last few months of 2016.

Remember, the CPO price rally in 2016 is not due to demand. It’s due to supply shortage caused by weather. The trees will recover after bad weather, and when they do, the overall supply normalizes and price will fall. The whole thing does not work perfectly but has causal effect and lag impact on share prices. The low production and high CPO price can last for few more months and we can’t predict it accurately, but I’m happy to take profit from my trading strategy.

Going Forward

The sell-side analysts are becoming more bullish on CPO market. They have adjusted their forecast CPO price for 2017 higher with each new report. The share prices of the palm oil producers have not reached unreasonable levels (yet). This indicates that they still expect the supply to normalize later this year. I hope they turn more bullish so that my other palm oil stocks can benefit. I’ve been sitting on Bumitama for some time. This one really needs patience.

 

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