Lee: The vision is not a complete redraft [of the existing Vision IOI]. We added new elements and simplified the language.
By Jenny Ng
Any diligent and cost-conscious planter knows only too well that a “good buy” is hard to come by these days. Two years after concluding the sale of a 70% stake in Loders Croklaan Group BV to Bunge Ltd, IOI Corp Bhd has yet to make a substantial acquisition with the proceeds that were earmarked for future investments. In fact, IOI Corp’s board has sought an 18-month extension for the usage of the RM983.2 million left from the RM3.8 billion sale price.
“[We] cannot find land, group managing director and chief executive Datuk Lee Yeow Chor tells The Edge in an interview.
He adds that the group is looking only at Malaysian plantations. It is not keen on Indonesian estates because it wants to avoid potential issues pertaining to land rights and sustainability, he explains.
“[Furthermore,] this kind of thing is opportunistic – it’s not that [when] you want to buy, you can buy. It depends on the seller and the price [must] meet your expectations. Principally, [we’re] looking at Malaysia only,” Lee says.
Through the 30% associate stake it retained in Bunge Loders Croklaan Group BV (BLC), IOI Corp has expanded its global presence with plants in four continents, selling to multinational companies. But IOI Corp wants to do more in line with its vision to be a leading and sustainable Malaysia corporation with a global presence.
“The vision is not a complete redraft [of the existing Vision IOI]. We added new elements and simplified the language. For example, we’ve always wanted to achieve balance and responsible growth. Now, we use the term sustainable. What is new is global presence.
“We have to adopt global best practices to be globally competitive. We want to do things that are not at the lowest cost. We want to move from commoditised products, which are based on lowest cost. We can’t move completely but we want to produce more good-quality, high-value-added or premium products at competitive cost. And when we produce such quality and premium products, we have to be exporting worldwide and be competitive worldwide. Our products can be competitive on a global scale,” Lee adds.
The plan is driven by five targets to be achieved by the end of five years from 2020 to 2024. First, the group aims to increase its plantations’ oil yield by 15% through improved planting materials and efficiency in crop evacuation through mechanisation. Secondly, it wants to reduce workers by 20%. Thirdly, it wants to diversify crop plantings and fourthly, it wants to derive a profit of RM100 million from non-crude palm oil (CPO) products. Lastly, it wants to increase the oleochemical segment’s profit contribution by RM100 million.
Through mechanisation, automation and digitisation of its estate operations and using molecular biology to improve planting material, the group aims to also address the issue of labour shortage.
To diversify its crop plantings, Lee says the plan is to plant 4% of its Malaysian plantations – equivalent to 6,000 ha – with other crops such as coconut over the next five years.
“That’s part of the strategy to diversify in a small way [from] our exposure to palm oil price volatility. It’s the main reason to diversify and discover other profitable crops, which may not be planted on the same scale as oil palm but may give good returns,” he says.
In terms of deriving value from non-CPO products, IOI Corp wants to use its empty fruit bunches (EFB), palm trunks, palm oil mill effluent and methane gas to produce value-added products.
“Again, we’re already using EFB for mass boilers, I’d say these are low value. We want to export premium products to be globally competitive. For EFB and palm trunk, these are already being done but we aim to be of a higher quality,” Lee explains.
As for the oleochemical segment, the group aims to increase the profit contribution through organic expansion and new product applications. The business contributed 33% to the group’s segment results of about RM1 billion in FY2019, compared with the plantation business’ 46%, refinery 16%, and BLC 4%.
In five years’ time, Lee expects IOI Corp to increase its earnings by RM250 million, which is about 25% of its operating profit in FY2019.
In FY2019, IOI Corp’s net profit fell 79.9% to RM617.6 million from RM3.068 bilion in FY2018 due to the absence of a material disposal gain arising from the sale of Loders. Meanwhile, profitability at its plantation segment was affected by lower CPO and palm kernel prices.
It was also during that financial year that group lost its founder and executive chairman, the late Tan Sri Lee Shin Cheng, who was Lee’s father.
Committed to the BLC joint venture
BLC’s 4% contribution may look small since it is only an associate, but by disposing of 70% of Loders, IOI Corp has been able to reap the synergies from the enlarged agribusiness group.
IOI Corp’s 2019 annual report showed that BLC reported comprehensive income of RM167.3 million for the year, compared with RM95.9 million in FY2018.
“Definitely, there’s opportunity for synergies. Production synergies through combining plants, marketing synergies – these are quite normal and definitely there. In terms of consumer trends, for specialty fats, we’re going more into the nutrition category. We started off with infant nutrition and milk powder, and now we’re going into elderly care and even pet care,” Lee explains.
BLC has also recently ventured into producing plant-based meat. “We are developing fats to be used in this [business] for certain leading companies. The partnership with Bunge helps because it is an investee in one of these plant-based companies,” Lee says, without offering more details.
The sales and purchase agreement included a five-year call and put option over IOI Corp’s 30% in BLC. Lee says it is speculative to comment on whether IOI Corp will be exercising the option and would only say, “We’re committed to this JV (joint venture) and profit has been increasing.”
Food safety issues equally important
As a palm oil producer with a total planted area of 176,156 ha, of which 89.1% are located in Malaysia, IOI Corp has had to deal with its share of allegations of illegal deforestation. Many will remember that in 2016, it sued the Roundtable of Sustainable Palm Oil (RSPO) for suspending its certification over breaches at its Indonesian estates. The suit was eventually dropped and IOI Corp took measures to engage with stakeholders to resolve the matter.
Lee conceded that the allegations were an impetus for the group to act and it has since won accolades in the environmental, social and governance (ESG) investing space. For instance, IOI Corp was included in the FTSE4Good Bursa Malaysia Index and Dow Jones Sustainability Indices in its Annual Sustainability Yearbook 2018, as well as the Carbon Disclosure Project on Forests Programme for having the most improved performance in Southeast Asia and Hong Kong.
“Nationally, we received the Prime Minister’s Hibiscus Award for environmental and safety measures for oleochemicals. So, we are putting ourselves on a good footing in the ESG space,” Lee says.
While stressing that enhancing the sustainability credentials of palm oil is important, Lee says the group also wants to continue improving the quality and food safety aspects of the commodity. He says apart from deforestation, the issues of contaminants such as 3-MCPD and hydrocarbons in palm oil have been raised in Europe.
“We shouldn’t be too obsessed with just addressing the environmental issues because that’s only affecting biodiesel. Fundamentally, palm oil’s major usage is food, so meeting the aspects of food safety is equally important, if not more important,” Lee says, adding that due to the constraints in land expansion, a major driving force in the palm oil industry will be improving the oil yield of existing palm trees.
“This will be done through technology. There are three main themes [for IOI Corp moving forward]: sustainability credentials, meeting quality and food safety aspects and improving yield through technology deployment,” Le says.
He is not worried about the gradual removal of the subsidy for palm oil biofuels in the European Union next year and the phasing out of the use of such fuel there by 2030.
“Palm oil biodiesel can be blocked through the withdrawal of subsidy but for food usage, palm oil does not rely on subsidy. So, it’s been competing on functionality and cost competitiveness. The business is market-driven. Based on the functionalities of palm oil, it is good for frying, free from trans-fat and cost competitive. Palm oil has a place in meeting demand for vegetable oils, particularly for food,” he explains.
In any case, IOI Corp’s Malaysian estates have been certified by the Malaysian Sustainable Palm Oil and RSPO while its Indonesia estates are in the process of being certified by the RSPO.
“Yes, this [certification] is integral to our business model. We’re not just certified, we are also selling the certifications. We are one of the largest sellers of sustainable palm oil,” Lee adds.
MCO impact on Sabah operations unknown
Last week, the Sabah government ordered the closure of oil palm estates and mills in six districts – Kalabakan, Semporna, Kunak, Tawau, Lahad Datu and Kinabatangan – to curb the spread of Covid-19. The areas cover about 780,000 ha and account for 75% of palm oil production in the state.
The order followed a spike in Covid-19 infections in the state, including among estate workers. Estate and mill operations have been exempted from the Movement Control Order (MCO) as the plantation industry is considered an essential sector.
About 64% of IOI Corp Bhd’s oil palm hectarage is in Sabah and Sarawak, mainly the former, the country’s top palm oil-producing state.
When asked about the group’s operations in Sabah, group managing director and chief executive Datuk Lee Yeow Chor says the full impact of the MCO and the state government’s closure order is still unknown.
“At IOI Corp, the health and safety of our employees remain our top priority. We fully support the government’s efforts to curb the spread of Covid-19.
“Operation-wise, we have implemented several precautionary measures and standard operating procedures at our estates to prevent the spread of the virus to our workers. We consistently educate and guide our workers to take protective measures and adhere to rules and regulations. To date, our workers and operations are in safe and good conditions [respectively]. We are fully committed and will continue to work closely with the authorities to undertake the necessary steps to curb the outbreak,” he says in an email response following an interview with The Edge (see main story).
In a March 31 note, UOB Kay Hian foresees loss of crude palm oil production in the affected areas to reach 240,000 tonnes a month, translating into a 2% drop in Malaysia’s total production this year. It also says IOI Corp, which is among the palm oil-producing companies it covers, will be affected by the closure order.
“Earnings impact on these companies will range from 1% to 5%, assuming a total crop loss for one month, except Hap Seng Plantations Holdings Bhd, which will see the highest impact of 26% to earning as 95% of its estates are in these [affected] areas,” it adds.