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Announcement:

Moody's: IOI's interim results to December 2013 should mark the peak gearing level

27 Feb 2014

Singapore, February 27, 2014 -- Moody's Investors Service says that IOI Corporation Berhad's (IOI) results for the half year to 30 December 2013 show some promise for the continuing CPO and downstream oleochemical business as higher CPO prices reflect the tightening supply and broadly support IOI's existing Baa2 stable ratings despite the high debt levels and reduced equity base resulting from a slew of corporate activities and the impact of translation losses on foreign currency borrowings.

"The recent pick-up in palm oil and palm kernel prices has yet to be fully seen in IOI's numbers although the plantation segment reported Q2 FY2014 profits of MYR314 million, 22% higher than the preceding quarter and 3% higher year on year, while profits from the downstream business also increased in the same periods by 19% and 48%, respectively," says Alan Greene, a Moody's Vice President, Senior Credit Officer.

IOI's demerger of its property division, was completed on 13 January 2014 and so the division was still reported in IOI's results as a discontinued operation. The discontinued businesses reported segment profits of MYR371 million in the six months to December 2013 up from MYR321 million in the corresponding period a year earlier turning a net debt balance of MYR60 million in June 2013 to net cash of MYR214 million at the end of December.

By contrast the net debt of the continuing businesses has grown from MYR4.28 billion as of June 2013 to MYR6.37 billion at the end of December 2013. The main outflows in the period were for an unchanged dividend of MYR543 million and MYR951 million for the acquisition of Unico-Desa (Unico). The period end balance of cash and similar funds was MYR1.45 billion in the core IOI.

Subsequent to the period end, IOI will have received some MYR1.88 billion from the sale of IOI Properties shares and MYR1.0 billion from an intercompany settlement prior to the demerger. As a result, liquidity remains strong with cash and similar funds more than enough to cover short-term debt of MYR518 million and the USD500 million bond due March 2015.

However, IOI has already spent MYR175 million on share buy-backs post the sale of the property division. As part of the restructuring, IOI introduced holding companies for its own plantation assets, the transfer of which (at market values), will have boosted the distributable reserves of IOI and thus its dividend paying capacity.

The prospects for CPO are currently strong with the dry weather causing a marked reduction in supply and thus raising CPO price levels. Based on the production of fresh fruit bunches (FFB), IOI's output for the three months ended January is some 2.4% down on the corresponding period a year ago but this is a better performance than some of its peers, and when compared to Malaysian CPO output (derived from FFB), which was 4.5% lower over the same period.

However, the acquisition of Unico, based in Sabah, adds about 7% to IOI's mature plantation area and thus to its production of FFB, and this purchase is extremely timely in an environment of rising CPO prices. While the West may be losing some enthusiasm for high cost renewable energy, palm oil producing nations are mandating increasing amounts of biodiesel in domestic consumption often as a means to reduce the rate of growth of crude oil imports and these actions should limit the growth of CPO stocks and thus underpin price levels.

Moody's notes that IOI's average realized price for CPO in H1 FY2014 of MYR2,386/tonne was still lower than the MYR2,585/tonne average of in H1 FY2013. However CPO prices have increased -- IOI's realisation was MYR2,425/t in Q2 FY2014 a slight discount to the period average market price of MYR2,554/t. Since the end of December the market price has climbed to MYR2,778/t as of today and we expect IOI's realization to have improved commensurately. The rise in the price of palm kernel oil a co-product of CPO production has been even more marked in recent months and this will further accelerate revenue growth.

Despite the increased plantation area, IOI will remain a net buyer of third party CPO for its downstream refineries and oleochemical businesses. As feedstock prices rise, margins may come under pressure but so far the demand for specialty fats and oleochemicals remains strong and IOI's plant utilization is high.

"We expect the tightness and thus the price levels in the CPO market to persist for the next few months although much will depend on conditions in the September quarter, usually the peak production period for palm oil," continues Greene, who is Lead Analyst for IOI.

"Assuming the CPO business performs as expected, then we anticipate robust cash generation from IOI, with funds directed towards further plantation acquisitions, downstream capex additions and with shareholders taking a large but manageable portion within the context of the Baa2 rating", adds Greene.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Alan Greene
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
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Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's: IOI's interim results to December 2013 should mark the peak gearing level
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