Saturday, February 21, 2009

IOI Earnings Results And Flashback On What Has IOI Done The Past One Year

Posted last night Comments And Views On Ringgit Fall To Two Year Low

How would a low ringgit impact Malaysian companies? Who would be impacted?

IOI Corporation came up instantly.

There were issues about its forex losses before and I knew that IOI has massive borrowings denominated in USD.

So I thought it would be a good simple exercise to have a brief look at some older earnings report for IOI.

I start with looking at what was on IOI's books back exactly a year ago, Feb 2008,
Quarterly rpt on consolidated results for the financial period ended 31/12/2007

Under the long term borrowings, USD denominated loans totals 656.488 million and IOI values these borrowings at 2.170 billion. This should works out to an exchange rate of around 3.31.

3 months later, in May 2008, IOI announced the following
Quarterly rpt on consolidated results for the financial period ended 31/3/2008

USD denominated loans now totals 1.112 BILLION and IOI values these borrowings at 3.547 BILLION. My calculator shows that this works to an exchange rate of 3.19.

Now I know this is a LOT but I do agree that it's hard to criticise IOI Corporation for what it did here.

Crude palm oil was booming and IOI Corporation were making totally insane profits. And with IOI able to obtain borrowing rates at 3.19, surely there were some justifications to borrow more in USD, yes?

Think about it.

The money in USD were getting cheaper and cheaper and with the US housing crisis the smartie pants reasoning was that the USD were going to plummet into the deep blue sea.

And what's better way to ride the USD weakness by borrowing more in that currency?

Was that not a justifiable reasoning?


This is what the company said back in May 2008 in its earnings notes.

  • Group revenue for YTD Q3 FY2008 is 58% higher than last year’s corresponding period. All major business segments reported increase in revenue as a result of higher palm oil prices, increased volume for resource-based manufacturing, as well as higher sales of properties.

    The Group's pre-tax profit for YTD Q3 FY2008 is RM2.24 billion , an increase of 61% as compared to the RM1.39 billion reported for YTD Q3 FY2007, contributed by better performances from all major business segments.

    Plantation earnings of RM1,302.4 million for YTD Q3 FY2008 is about twice the earnings generated for YTD Q3 FY2007, boosted by significantly higher CPO prices. Average CPO prices realised for YTD Q3 FY2008 is RM2,705 per MT as compared to RM1,649 per MT for the same period last year. The resource-based manufacturing segment continued to perform well for YTD Q3 FY2008 with an increase in operating profit by 47% at RM457.4 million with the inclusion of profit from Pan Century Group as well as volume and margin growth from all three sub-segments.

    The property segment’s operating profit is about previous year’s level at RM310.6 million. Overall, the Group achieved net earnings of RM1.63 billion for YTD Q3 FY2008, a 59% increase over the RM1.03 billion recorded for YTD Q3 FY2007. The percentage increase of the Group’s net earnings level is slightly lower than the percentage increase of the Group’s pre-tax level due mainly to higher tax expense as a result of the expiry of certain tax incentives granted by the tax authority at the end of FY2007.

    In the opinion of the Directors, the results for the financial period under review have not been affected by any transaction or event of a material or unusual nature which may have arisen between 31 March 2008 and the date of this announcement.

Now I know very well that the above statement left out one important note. Quarterly earnings were boosted by gains in forex gains of 226 million (hey IOI borrowings in USD in Feb 2008 were valued at 3.31 and 3 months later the rates fell to 3.19.). Do look under segmental reporting and you can see it. ( link: Quarterly rpt on consolidated results for the financial period ended 31/3/2008 )

Three months later, Quarterly rpt on consolidated results for the financial period ended 30/6/2008.

Despite the now falling crude palm oil prices, the following was a sample news clip trumpeting IOI fiscal year success, IOI shines with RM2.23bil profit. Do note that the non-existent mention of the forex gains, one have to read the finer details in the earnings report to see it.

Huge success for IOI.

Everything it had was gold.

Rm2.23 billion in net profit. Record earnings. They borrowed more and due to the weakening USD dollar, what they borrowed is now less.


Time to venture more.

Then came August 2008. Article entitled: IOI Corp wins bid for Menara Citibank?

  • We wish to inform that IOI Corporation Berhad has succeeded in its bid for the purchase of Menara Citibank and has reached an agreement with Inverfin Sdn Bhd and its shareholders to enter into a definitive agreement in due course.

A RM586 million deal of buy an office building!

I was shocked.

But like many others, who are we to question when IOI Corp had the winning hand? Everything they touched were turning into gold literally.

Then came October. It was a hell of a month. The US housing crisis had turned into a global crisis. And worse still the street got wind of IOI plunging on forex losses! IOI share price then plunges on these forex losses newss

And the most incredible article then was Citigroup makes buy call on IOI Corp

  • Citigroup has fairly valued IOI Corp’s share price at RM7.46 on the basis that it would trade at 22.7 times of its price to earnings ratio from its current financial year forecast profits of RM2.1 billion.

That was a bold valuation in my flawed opinion. It was based on a forecast of a net profit of rm2.1 billion. I found it absurd. Crude palm oil prices were falling off the cliff. Was it right to project such a high profit forecast?

So how much was the forex losses? Forex announcement.pdf

The sum of all fears

  • IOI Corp had closed at RM3.02 on Oct 23. Over the next two trading days, it was in a downhill roll that pushed the share price to a 52-week intraday low of RM2.08. That’s a 31% plunge in a period when the KL Composite Index was never more than 10% down.

    The counter has clawed its way back to RM2.74 last Thursday and it looks like the painful streak has ended, thanks partly to the company’s explanation on its forward foreign currency contracts. Nevertheless, the episode has raised some questions. (do read the article in full)

Then came November. Everything was falling apart fast.

Quarterly rpt on consolidated results for the financial period ended 30/9/2008

Snippet from a Dow Jones news clip.

  • IOI Corp 1Q Net Profit Down 36%; Expects Weaker Fiscal 2009

    KUALA LUMPUR (Dow Jones)--IOI Corp. (1961.KU) said Friday
    first-quarter net profit fell 35.7% due to foreign exchange losses and poorer results from its property unit, and expects weaker results for the 2009 fiscal year.

    Malaysia's second-largest plantation group by acreage said in a filing to the stock exchange that net profit for the quarter to Sept. 30 fell to MYR290.5 million from MYR451.5 million a year earlier.

    The company said it had a foreign exchange loss of MYR100.6 million from its resource-based manufacturing business segment and from the partial conversion of proceeds from U.S. dollar-denominated borrowings.

I was thinking out loud fast. During the good times, it was just in May's quarterly earnings, it had forex gains of over 226 million in its book. But it kept quiet on how this forex gains did boost its earnings. Now they have a forex losses, they start using it as an excuse for their poor earnings.

And later that month, came another shocker.

IOI CORPORATION BERHAD ("the Company") - Proposed Acquisition of the entire equity interest in Inverfin Sdn Bhd ("Proposed Acquisition")

IOI Corp’s RM73m deposit for Menara Citibank forfeited

Shocking! Everyone was simply shocked!

In the following article on bizweek,IOI Corp should better explain why it’s losing its RM73mil deposit, the following issues were raised!

  • So, why is that changed in three months? Was there an exodus of tenants from Menara Citibank? Did the rental income drop? Was there a collapse in office space prices? Why is the acquisition not strategic anymore?

    Why could not IOI Corp have foreseen these problems earlier? After all, the subprime crisis was already upon us. Why did it pay the deposit which it now has most likely lost if it had felt there could be problems?

    IOI Corp’s explanation is poor at best and we really don’t know what it is at worst. Investors certainly expect a lot more from this company, once the darling of the stock market. And so should regulators. Minority shareholders certainly have a right to be seriously upset.

    Coming so soon after its recent debacle where it reported foreign exchange losses of over RM312mil for the quarter to end-September, the latest episode will put another dent in its reputation, largely unsullied until the forex episode.

It was shambolic in my flawed opinion. As mentioned the global crisis was a known issue then. Why did IOI still insist on a deal worth 586 million to buy Menara Citibank? Did the success of the insane profits got to their heads? Did it?

And sad to say this is so embarrassing for IOI. Losing 73 million makes them such a 'water fish'!

A day after IOI lost its 73 million, Flitch announces that it is lowering IOI credit rating and cites higher risk. Few days later Moody's cuts IOI Corp's credit rating

  • IOI Corp , Malaysia's second-largest palm oil producer, had its credit rating cut by Moody's Investors Services, which said the company's share buyback and "hefty" capital distributions have increased its debt.


Yesterday IOI Corp announced its earnings.

Quarterly rpt on consolidated results for the financial period ended 31/12/2008

Net earnings is now only 168 million. Last quarter it had 290.50 million. A year ago same period, it had 581 million in profits! (Citigroup's profit forecast of rm2.1 billion for IOI is now really looking absurd now!)


With the recent strength of the USD, coupled with the weakness in the Malaysian Ringgit ( Comments And Views On Ringgit Fall To Two Year Low ) , I was naturally not shocked to see that IOI is saying that its Q2 net hit by forex losses, IOI Q2 net profit falls

  • IOI Corp Bhd’s second-quarter ended Dec 31 net profit plunged 71% to RM168.6mil from RM581.2mil in the previous corresponding period on falling palm oil prices, huge foreign exchange losses and a weak property market.

    The drop in profit also calls for a lower dividend for shareholders. For the period under review, IOI Corp proposes to pay out 3 sen per share compared with 7 sen per share paid a year earlier.

The news of the lower dividend is not going to be well received! (edit: On Star's Bizweek Is dividend under threat? - time to re-evaluate one's opinion on the safety of investing for a stock's dividends. Reason is simple. If earnings falls drastically, companies COULD cut their dividends as seen in IOI's example here!!! )


Here I sit wondering again the same issue as I had written earlier.

  • I was thinking out loud fast. During the good times, it was just in May's quarterly earnings, it had forex gains of over 226 million in its book. But it kept quiet on how this forex gains did boost its earnings. Now they have a forex losses, they start using it as an excuse for their poor earnings.

Same issue yes? Last time they mention nothing when they book some 226 million profits from forex gains. Now they have this forex losses, they make such a big fuss over them.

Am I wrong to point this issue out?

The following is a screen shot of their total borrowings from their earnings report last night.

Under the long term borrowings, USD denominated loans totals 1.100 Billion and IOI values these borrowings at 3.816 billion. This should works out to an exchange rate of around 3.43.

Yesterday at 5pm, the ringgit was traded at 3.6770/6790 against the dollar.

Let's reflect back on the earlier point made on IOI taking more USD denominated loans!

The assumed collapse in USD has not happened!

And IOI borrowed more!

And now what they had borrowed equates to them owing more money!!!!

And the longer the ringgit remains weaker against the USD, the greater the pain for IOI Corp!

Here's the USD vs MYR one year chart again. (see Charts Of USD Vs Other Currencies On a One Year Time Frame )

Does the ringgit looks like it's going to strengthen against USD anytime soon?


And double Ouch!


In my flawed opinion, it looked like IOI Corp made several bad moves during their record breaking year last year.

They assumed the USD was going to tank, so they borrowed more in USD. ( Yes, one day the USD could tank but hey don't ask me, I do not know when!)

They got itchy and went into an agreement to buy an office tower. They lost 73 million!

They lost huge money with their forex hedging (sorry to complicated for me to comment on what exactly they did!)

Ouch! Ouch! Ouch!

I do not know but on hindsight now, do you think that they should have been more prudent during their great times last year?

Here is the one year chart for IOI Corp. Ouch!