US CBP’s inquiry in labour practice could hurt IOI’s valuation

PublicInvest reduces its valuations on IOI Corp, resulting in a lower SOTP-based TP of RM4.41


IOI Corp Bhd’s valuation could be negatively impacted due to the increasing concerns in the company’s environmental, social and governance (ESG) practices that could put off foreign investor interest in the counter following the US Customs and Border Protection’s (CBP) letter on alleged labour abuse at the company.

IOI Corp share fell seven sen or 1.8% yesterday to RM3.75 on the news.

Public Investment Bank Bhd (PublicInvest), in a report yesterday, noted that the integrated edible oils group will reach out to the US authority to address those allegations.

“Though there are no financial impacts for now, it could negatively affect the company’s valuations due to the increasing concerns in ESG (practices) and may also put off foreign investor interest (standing at 10.63% of shares held).

“In line with our previous downward revision on both Sime Darby Plantation Bhd and FGV Holdings Bhd’s valuations for similar allegations, we also reduce our valuations on IOI Corp, resulting in a lower sum-of-the-parts (SOTP)-based target price (TP) of RM4.41,” its analyst Chong Hoe Leong noted.

Migrant rights activist Andy Hall told Reuters he had petitioned the CBP over concerns in forced labour indications in IOI Corp’s operations as alleged by the workers.

Hall confirmed that the CBP had responded in May with a letter saying they have reviewed his allegation and found it sufficient to open an investigation.

“It is understood the concerns relate to payment of deposits by workers, reimbursement of workers’ recruitment fees and a need for an ethical, low-cost recruitment process for foreign workers,” said Chong.

IOI Corp is the third palm oil giant in Malaysia to face US scrutiny over its treatment of migrant workers.

The CBP last year banned palm oil imports from FGV and Sime Darby Plantation over forced labour allegations, which had prompted some global buyers to shy away.

Based on IOI Corp’s financial year 2020 annual report, commodity and oleochemical exports to the North American region made up 11.1% and 4% of sales respectively.

Chong warned if IOI Corp is found guilty on the allegations, it will trigger a US ban on its palm oil product exports and require a remediation sum to compensate its migrant workers.

“In addition, IOI Corp’s Roundtable on Sustainable Palm Oil-certified status will also be at risk,” he added.

The company’s forward valuation is currently trading at a price-to-earnings ratio of 20.5 times compared to the 10-yearaverage of 28 times.

In the near term, IOI Corp share price could see temporary weakness due to the uncertainties, the investment bank noted.

“In line with our previous downward revision on both Sime Darby Plantation and FGV’s valuations, we also reduce our valuations on IOI Corp (down to 23 times from 25 times for plantation segment and to 18 times from 20 times for manufacturing),” said Chong.

CGS-CIMB Securities Sdn Bhd analyst Ivy Ng Lee Fang stated that the CBP’s letter will negatively impact sentiment on IOI Corp shares due to concerns the company could be penalised for this controversy through ESG ratings or the issuance of a withhold release order by the US CBP.

“IOI Corp appears confident it can defend itself against any forced labour allegations and is willing to engage with stakeholders. We think these are positive attributes for IOI Corp.

“However, it will take time before the CBP makes any decision on this matter and the overhanging risk may dampen share price performance,” said Ivy in a research report yesterday.

CGS-CIMB reduced IOI Corp’s TP to RM3.97 after applying a 10% discount to its SOTP valuation method to reflect this concern. The research firm added that the company’s shares will be supported by its buyback programmes.