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Rating Action:

Moody's affirms IOI Corporation's Baa2 ratings

03 Jul 2019

Singapore, July 03, 2019 -- Moody's Investors Service has affirmed the Baa2 issuer rating of IOI Corporation Berhad (IOI), the Baa2 senior unsecured bond ratings of IOI Investment (L) Berhad, and the Baa2 senior unsecured bank credit facility rating of IOI Ventures (L) Berhad.

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

At the same time, Moody's has maintained the stable outlook.

RATINGS RATIONALE

"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 MYR2,100 per metric ton, Moody's expects IOI's adjusted leverage -- as measured by adjusted debt/EBITDA -- to decline slightly to around 3.0x over the next 12-18 months from 3.2x for the 12 months ended March 2019. This improvement will be driven by modest earnings growth and debt reduction via scheduled amortization payments.

"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 3.5x downgrade trigger on a sustained basis," adds Hasnain, also Moody's Lead Analyst for IOI.

IOI has thus far not spent any of the MYR960 million earmarked for future investments, from the MYR3.8 billion it received from asset sales in 2018. IOI also reduced its first interim dividend for the fiscal year ended June 2019 (fiscal 2019) to MYR220 million from MYR283 million in fiscal 2018 in light of weak palm oil prices.

IOI maintains a strong liquidity profile with a large cash balance (including short-term funds and deposits) of MYR2.3 billion as of 31 March 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 rating also considers IOI's moderate exposure to environmental, social and governance (ESG) risks as follows.

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 2.0x and EBITA/interest expense above 8.0x.

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 3.5x or adjusted EBITA/interest expense below 6.0x.

The principal methodology used in these ratings was Protein and Agriculture published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Malaysia, IOI Corporation Berhad 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 31 March 2019.

IOI also has a resource-based manufacturing segment with operations in Malaysia and Germany. The founding Lee family has the largest stake in IOI, owning around 49% of the company as of June 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maisam Hasnain, CFA
Analyst
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
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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