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Moody’s Affirms IOI Corp’s Ratings, Maintains Stable Outlook
03/07/2019The Star

Moody's Investors Service has affirmed the ratings of cash-rich IOI Corporation Bhd and maintained the stable outlook
due to its strong liquidity profile with a large cash balance of RM2.3bil as of March 31, 2019.

KUALA LUMPUR: Moody's Investors Service has affirmed the ratings of cash-rich IOI Corporation Bhd and maintained the stable outlook due to its strong liquidity profile with a large cash balance of RM2.3bil as of March 31, 2019.

“Together with projected cash flow from operations, these sources will be sufficient to cover projected capital spending, dividends and scheduled debt maturities over the next 12 months,” the ratings agency said on Wednesday.

Moody’s has affirmed the plantation giant’s Baa2 issuer rating, the Baa2 senior unsecured bond ratings of IOI Investment (L) Berhad, and the Baa2 senior unsecured bank credit facility rating of IOI Ventures (L) Bhd.

Moody's also affirmed the provisional (P)Baa2 backed senior unsecured rating on the medium-term note (MTN) program of IOI Investment (L) Bhd.

At the same time, Moody's has maintained the stable outlook of IOI Corp, which is one of the largest global palm-oil producers with a total oil-palm planted area of around 175,879 hectares, of which 90% was located in Malaysia as of March 31, 2019.

"The rating affirmation reflects our expectation that IOI will keep its credit metrics commensurate with its current rating level, while maintaining strong liquidity and pursuing prudent financial policies," says Maisam Hasnain, a Moody's Analyst.

Despite weak crude palm oil prices (CPO) over the last 18 months, IOI has maintained its credit profile primarily through debt reduction and also improved earnings at its downstream businesses, which in turn were supported by lower feedstock costs.

Based on Moody's medium term price assumptions for CPO of RM2,100 per tonne, Moody's expects IOI's adjusted leverage -- as measured by adjusted debt/EBITDA -- to decline slightly to around three times over the next 12-18 months from 3.2 times for the 12 months ended March 2018.

This improvement will be driven by modest earnings growth and debt reduction via scheduled amortisation payments.

Hasnain, also Moody's lead analyst for IOI said “IOI's Baa2 rating incorporates our expectations that IOI will take a prudent approach to any investment and shareholder returns, such that it does not materially weaken its credit profile, with adjusted leverage -- as measured by adjusted debt/EBITDA -- remaining below the 3.5 times downgrade trigger on a sustained basis."

IOI has thus far not spent any of the RM960mil earmarked for future investments, from the RM3.8bil it received from asset sales in 2018. IOI also reduced its first interim dividend for the fiscal year
ended June 2019 (fiscal 2019) to RM220mil from RM283mil in fiscal 2018 in light of weak palm oil prices.

“The rating also considers IOI's moderate exposure to environmental, social and governance (ESG) risks as follows,” the rating agency said.

Firstly, the increasing stakeholder scrutiny around environmental and social risks associated with the palm oil sector. To help mitigate against these risks, IOI has strengthened its sustainability policies in recent years, including committing to a policy of no deforestation, no development on peat, and no exploitation of workers.

IOI has also adopted a policy whereby it will only conduct new planting in areas which have been verified by a certification body accredited by the Roundtable for Sustainable Palm Oil (RSPO) that social and environmental requirements have been met. The RSPO is an association of industry stakeholders that promotes the growth and use of sustainable palm oil products.

Secondly, Moody's has taken into account IOI's concentrated ownership with the founding Lee family owning a 49% stake in the company. This risk is somewhat mitigated by oversight exercised through the presence of majority independent directors on its board, and minority shareholders including Malaysia's Employees Provident Fund Trust, which owns a 13% stake in IOI.

The rating outlook is stable, reflecting Moody's expectation that IOI will (1) maintain its credit profile and prudent and conservative approach to investments and shareholder returns; and (2) remain committed to its sustainable palm oil policy.

Upward rating momentum could develop if IOI grows in scale while demonstrating a sustained improvement in its financial profile and maintaining strong liquidity in the form of cash balances, short-term liquid assets and committed facilities.

Credit metrics indicative of a rating upgrade include adjusted debt/EBITDA below two times and EBITA/interest expense above eight times.

The rating could be downgraded if IOI's credit quality weakens as a result of challenging industry fundamentals or a deviation from its stated prudent financial policies around acquisitions and shareholder returns.
Any public concerns around the sustainability of its products or operations, thus raising reputational risk, could also lead to negative rating pressure.

Credit metrics indicative of a rating downgrade include adjusted debt/EBITDA above 3.5 times or adjusted EBITA/interest expense below six times.

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