Locked-in profits

Going by the oversubscription for IOI Corp Bhd's exchangeable bonds, demand for palm oil stocks continues to be very strong.

IOI announced last week that its exchangeable bonds, also known as convertible bonds (CBs), were snapped up within 1½ hours after the book opened. The offering attracted bids for US$3bil (RM9.8bil), an oversubscription six times the planned issue size of US$500mil (RM1.6bil).

As a result of the strong demand from global investors, the issue size was expanded to US$600mil (RM1.9bil), the company said.

The demand was huge in spite of the exchange price of RM11.00, which was a premium of 30.2% over IOI Corp's share price of RM8.45 on Jan 8.

The investors obviously believe IOI Corp shares price would grow to well as RM11.00 each, which would be their only payoff because the yield-to-maturity is just 1.25%.

For IOI Corp, it has raised a lot of cash at a very low cost, which could be used for a very sizeable acquisition.

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Q&A with IOI Group head: A passion for oil palm

Business Times

Tuesday - January 08, 2008

Tan Sri Lee Shin Cheng, the head of IOI Group, is the fourth richest person in Malaysia and an icon to many businessmen. Lee, who started off selling ice-cream on a bicycle, tells Chok Suat Ling that with hard work, perseverance and discipline, anything is possible.

QUESTION: Tan Sri, you are well known for your passion for your work and the oil palm plantations. There is a story making the rounds about how you even talk to the trees. What were the lessons learned along the way which helped you stay focused, as it were?

ANSWER: Yes, besides loving my good management team, I also love all my palm trees because they are all my workers, too. When we are sleeping, they are still working for us for 24 hours without complaining.

Therefore, I feel that it is my duty to look after these trees well. I make sure the welfare of these ‘good staff’ of mine are well taken care of by giving them adequate nutrition and by removing any hazards around them. I try to understand their behaviour and to communicate with them. When palm trees look ‘pale’ or exhibit abnormal characteristics, they could be ‘hungry’ (malnourished); suffering from disease or pest attack; or the palm base could be waterlogged; or there might be weeds surrounding the trees. When I see these signs of unhealthiness, I will turn to the manager or the assistant in the estate to let them know that the palm trees are complaining to me that they are hungry or suffering from disease. I will check with the manager or the assistant and find out why they are not taking care of the trees. Maybe because of this, people say I could talk to the trees!

Q: Did you think, back in the days when you were selling ice-cream, that you would become one of the most respected plantation men in the business?

A: I never thought this would happen. But coincidentally, when I was selling ice-cream at the age of 11 for four years, most of the time I would sell them at oil palm and rubber plantations.

Q: What were the personal highlights for you?

A: My happiest day was in 1989 when I bought over Dunlop Estate from Multi-Purpose Holdings Bhd. This was because during the late 1960s, I had applied for a job at Dunlop Estate but they did not employ me because I was not adequately qualified. If they had employed me, I would probably not have owned the entire asset of Dunlop Estate today. This purchase marked a significant milestone in my life.

Q: Were there low points as well? And how did you overcome them?

A: I started working in a small plantation as a supervisor in 1961. I worked my way up to be an assistant, and then manager. At that point in time, the estate was broken up and sold in fragments. The management paid me a handsome retrenchment benefit. With that money and savings, I started a pig farm with a friend where we bred up to more than 2,000 pigs. A year later, when the pigs were infected with swine fever, we had no choice but to close down the farm. I managed to recover only RM5,000. With that money, I started a petrol station and worked part-time in a plantation. That was my low point.

Q: You remain very hands-on with your business. Why? Do you think that is the mark of a great leader?

A: Yes, I remain very hands-on and focused on the business. I strongly believe nothing can replace that. If things need to be done by today, we have to get it done right now, not tomorrow. A good leader must set a good precedent for the rest to follow.

Q: What are the values you want to pass on to your children?

A: I would like to pass good values and discipline to my children, and I always tell them honesty is the best policy and to also contribute to society one way or another.

Q: How do you think you can get the younger generation to feel this same passion for their work, their country?

A: Unfortunately, today’s younger generation do not enjoy this type of work. They love IT (information technology) and quick profit. They do not have the stamina to wait. In agriculture, the gestation period is quite long. But I am trying to figure out how to enhance this industry and improve productivity for the benefit of the people. To be a planter is a very noble profession. The future in this field is very bright. Therefore, I urge young people to change their attitudes.

Q: Who are the Malaysians who are your heroes? Who inspire you?

A: There was a man in the mid-1960s who had the vision and wisdom to acquire the plantation company which was established and owned by the British by buying over the shares owned by them. This was none other than the late Tan Sri Lee Loy Seng. His courage and vision, to a certain extent, turned around the plantation industry in Malaysia. His tireless efforts to contribute to this industry to make it what it is today should be remembered. His achievements and contributions to this sector, to a certain extent, inspired me to be in this industry. I would say he is my role model.

Q: What are the things you would like to see improved upon?

A: Crude palm oil (CPO) is very versatile, and the usage of CPO is tremendous. However, usable land for the planting of oil palm trees is very limited. The only way to improve the volume of the CPO is to increase the productivity by using the same area of land. If we can increase the productivity per hectare from the national average of four tonnes of CPO to eight tonnes, then we will be able to double the CPO production from the current 16 million tonnes to 32 millions tonnes a year. If we are able to do that, then we are already doing a big favour to satisfy the oil consumption for the people. Perhaps, this would better satisfy the competitive needs for both the food and industrial, particularly biofuel, use. This is one of the things I hope to benchmark for the industry. With the cooperation of everyone, I’m sure this target is achievable.

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IOI Corp raises US$600mil

KUALA LUMPUR: IOI Corp Bhd said it raised US$600mil from a convertible bond, taking advantage of a global commodity boom and giving it a war chest for acquisitions.

IOI has since September 2004 raised about US$1.8bil selling dollar-denominated bonds, in a period when the price of Malaysian crude palm oil has more than doubled and the world looks to the edible oil as an alternative energy source.

IOI in November said it plans to acquire privately held firms and boost investments in the US and Indonesia. – Reuters

IOI Prop unit buys Singapore land for condo project

Thursday January 10, 2008

By ANGIE NG

PETALING JAYA: IOI Properties (S) Pte Ltd (IOIP), a wholly owned unit of IOI Properties Bhd, together with its joint venture partner, Ho Bee Investment Ltd, have successfully tendered for a 5.3-acre land parcel in Singapore’s Sentosa Cove, for S$1.097bil cash.

In a filing with Bursa Malaysia yesterday, IOI Properties said a new joint venture company, Pinnacle (Sentosa) Pte Ltd, which is 65%-owned by IOI Properties, had been set up to acquire the land and undertake its development into an upmarket condominium project.

The 99-year leasehold land parcel under the Pinnacle Collection has a maximum permissible gross plot ratio of 2.6.

The site would have a condominium of up to 20 storeys, the tallest building in Sentosa Cove. The maximum number of units allowed in the development is 357, while the maximum permissible gross floor area is 602,359 sq ft.

An artist’s impression of the Seaview Collection condominiums

When completed, the project will offer panoramic views of the South China Sea, the Southern Islands, Tanjong golf course and the city skyline.

The site is the final piece of condominium land to be launched by Sentosa Cove. Pinnacle Collection is one of the two condominium parcels flanking the entrance of the marina leading into Sentosa Cove.

Ho Bee is also the joint-venture partner of IOIP for the successful tender and acquisition in March last year of a 3.6-acre parcel under the Seaview Collection in Sentosa Cove.

A luxury condominium development comprising two eight-storey apartment blocks of 151 units of various sizes is being planned on the site, and sales are expected to commence in the first half of the year.

A company spokesman said the two developments in Sentosa Cove would start contributing to IOI Properties from the next financial year ending June 30, 2009.

He said the designs for the Pinnacle condominiums were still being finalised. The residences would have an average built-up area of 2,000 sq ft.

Going by the existing market price of between S$2,000 and S$3,000 per sq ft for recent condominium projects in Singapore, the Pinnacle Collection project can expect to generate a gross development value of close to S$2bil while the Seaview project will gross around S$1.25bil.

In the statement, IOI Properties said Singapore was chosen as a platform for the group’s regional diversification as properties in the republic were presently one of the most sought after in the region.

“Our association with luxury landmark developments in Sentosa Cove will enhance the IOI Properties brand name and reputation as a luxury quality homes developer not only in Malaysia and Singapore, but also in the larger South-East Asia region,” it added.

Source here

Exciting year ahead for corporate Malaysia

Tan Sri Lee Shing Cheng

TAN SRI LEE SHIN CHENG

Executive Chairman

IOI Corp Bhd

YOUR views on the escalating risks in the plantation sector’s crucial growth parameters such as the scope of expanding oil palm areas, control of harvesting costs and maintaining high yields?

The most challenging factor for growth would be finding suitable land to cultivate. First, land prices have escalated. Second, not all agronomically-plantable land is suitable in today’s context.

We are all concerned about the environment and the impact businesses have on the environment. We need to ensure that business is conducted under sustainable business models. In the case of palm oil, the cultivation of oil palm should be in accordance with sustainability principles and criteria as prescribed by Roundtable of Sustainable Palm Oil, of which IOI is a founding member.

Among other things, this means for instance, that virgin forest or areas with “high conservation value” or peat areas more than 2m deep, should not be touched.

On the cost front, the most serious area of cost increases is fertilisers. Five years ago, we used to spend about RM800 per hectare per annum on fertilisers. Today, the amount has almost doubled and it's still going up. Fortunately, the strengthening ringgit has mitigated the increase.

As for maintaining high yields, we hope to not only maintain but to further improve as well. Oil yields per hectare can be further improved both in terms of FFB yield as well as extraction rates at the mills.

How do you foresee the 2008 growth outlook for biofuel/biodiesel industry in Malaysia amid the international trade limitations, higher feedstock (CPO) prices, sustainability and the food versus fuel debate?

The growth of the biofuel/biodiesel industry is mainly driven by Europe and the US. For these regions, the main consideration is energy security and therefore, governments are backing the development of the bio-energy sector either in the form of subsidies or mandated use.

There are clear targets in these countries and hence the growth trend is expected to continue. Besides, for the developed countries, food prices is not such a big issue. For poorer nations in Asia and Africa, escalating food prices is a serious concern.

In Malaysia, cooking oil is a price-controlled item and the bigger producers are required to contribute to a cooking oil cess. Hence, since we even have to subsidise cooking oil, we will not be ready for the biodiesel industry to take off in Malaysia as yet.

Globally, the amount of palm oil that is used for bio-energy is very low (less than 5%). Palm oil will continue to face obstacles as a feedstock for bio-energy in places like Europe.

However, despite all these, we see palm oil demand and palm oil prices going up. This is because as more rapeseed oil, soy oil and corn gets diverted to the bio-energy sector, more palm oil is needed to fill up the shortfall in the food and other sectors.

I see the food versus fuel debate continuing. Unfortunately, the world is hungry for both food and fuel. But as I said, actually, very little of palm oil goes to fuel at the moment.

Do you agree that the structural changes in the global commodities supply and demand pattern i.e. the biodiesel market, the fight for hectarage to plant corn for ethanol instead of soy bean and rapeseed in the US and South America, trans-fatty acid concerns, China and India relaxing their palm oil import tariffs, will lend support to higher CPO prices in 2008?

Prices of soft commodities in general are expected to remain high. In the case of vegetable oil, supply over the next 12 months, with the notable exception of palm oil, is expected to lag behind consumption again.

Hence, prices of soy oil, rapeseed oil and sunflower oil will remain high and will even go higher if projected production is cut by unfavourable weather.

Palm oil production growth, on the other hand, will be above average but this is not a bearish sign because its surplus supply is needed to make up for the deficits in the other oil.

Overall, for 2008, palm oil prices will follow the lead of other vegetable oil which prices are expected to be high.

Your company’s strategies in 2008 and the rationale behind it, i.e. overseas expansion, refineries, mills, biomass, biodiesel projects or carbon credit initiatives.

We are bullish about the long-term prospects of palm oil and will continue to invest at the appropriate time and in an appropriate manner to grow the business, both upstream and downstream.

We recently entered into a joint venture (JV) to invest in oil palm cultivation in Indonesia. Our effective interest in the JV is equivalent to about 70,000ha, which is nearly 50% increase to current planted hectarage in Malaysia. It is, therefore, a very significant addition and this will likely be the main area of focus in 2008 for the upstream sector.

We will also further invest in downstream operations in Malaysia as well as Europe and the US over the next two years to capture demand, further value add and innovate on the use of our palm oil fractions.

Also, not forgetting that we have a sizeable property business that should also see decent growth as the market is improving.

The current volatile CPO prices from RM2,900 to RM3,000 per ton have made it very difficult for planters to lock in their CPO selling prices. At what price would your company be “comfortable” with for FY2008 and FY2009? Kindly indicate your average cost of production annually.

We are “comfortable” with the current price levels but will not be aggressive on forward sales, as there are upside risks. Our production cost is about RM550 per tonne. However, cost of sales, after factoring in transport costs, Sabah sales tax and cooking oil cess, is about RM950 per tonne.

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IOI building muscle to become Stronger and Bigger

Although it wasn’t published officially the people around the palm oil industry knew what awaken the plantation sector. It used to be one of the most boring sectors and the related stocks’ movement could out you to sleep. It started with the Super-Merger that saw the merger of Kumpulan Guthrie Berhad, Sime Darby Berhad and Golden Hope Plantations Berhad creating the biggest listed palm oil producer in the world in terms of output and market value under a new company called Synergy Drive. As expected the branding of Sime Darby was too valuable to be put to sleep and the temporary Synergy Drive was renamed Sime Darby Berhad (SIME: stock-code 4197) again.

In actual fact the Super-Merger involved 9 (nine) listed companies and somehow StockTube believed the shareholders were under-offered. Almost simultaneously, other palm oil players were awaken and sensing that they could be eaten up alive (not that it have not happen before), the boring chess game begun its interesting movement. Less than a month after the mega-merger, IOI Corp Berhad (KLSE: IOICORP, stock-code 1961) acquired Pan Century Group, operator of an edible oils refinery for RM423 million from one of India’s conglomerates, the Aditya Birla Group. The acquisition by IOI Corp created the the world’s biggest vegetable oil-based fatty acid producer in the world.

Then the Kuok Group, controlled by tycoon and richest man in Malaysia, Tan Sri Robert Kuok, undertook a mammoth S$6.6 billion (RM15.18 billion) corporate exercise to merge several of its companies in Malaysia and Singapore - Wilmar International Ltd (SIN: F34) and PPB Oil Palms Bhd (KLSE: PPB, stock-code 4065). It was then Kuala Lumpur Kepong Berhad’s (KLSE: KLK, stock-code 2445) turn when it announced the acquisition of Swiss-based Dr W Kolb Holdings AG, a specialty oleochemical holdings company, for 135 million Swiss francs (RM393.39 million).
Amongst all the players, the most aggressive would be IOI Corp Berhad. Taking the second seat in terms of market capitalization behind Sime Darby Berhad is not a situation to be taken with complacency. In terms of landbank IOI Corp’s figure stands at 320,000 ha (after the 152,504ha of palm oil plantation in Kalimantan from Indonesia's Harita Group) while Sime Darby is comfortably at 543,626ha of landbank. And IOI Corp’s executive chairman Tan Sri Lee Shin Cheng has no plan of stopping at the current level.

Yesterday, it was reported that IOI shareholders approved a planned US$600 million (RM2 billion) issue of bonds exchangeable to new shares. "We actually have enough funds for expansion and upgrading of manufacturing facilities. The money from this bond issue is mainly for acquisitions." IOI executive chairman Tan Sri Lee Shin Cheng said after shareholders meeting in Putrajaya.

While Lee said the company was looking at either Malaysia or the region for future acquisitions and it’s not to “compete” with Sime Darby, you just got to take that with a pinch of salt. He knew too well how the corporate scenes in Malaysia are being played. Furthermore to be known as the most efficient producer in squeezing six tonnes of crude palm oil per hectare in a year, Tan Sri Lee Shin Cheng is no ordinary man you could squeeze easily. In addition there is still some RM300 million left unspent in IOI's planned capital expenditure for the current year ending June 2008. Add that to the latest RM2 billion war-chests from the bonds issued and you can guarantee of more interesting acquisition(s) from IOI Corp.

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IOI Corp plans second US plant

PUTRAJAYA: IOI Corporation Bhd plans to set up a second plant in the East Coast of the US to expand its existing businesses there, apart from its Chicago plant as part of its expansion drive.

“We are in the middle of negotiating to purchase the land. Geographically, it has to be in the right position, as logistics costs are concerns to us,” said its group executive director Datuk Lee Yeow Chor.

Presently, IOI Corp has a plant in Chicago to produce fats for food ingredients manufacturers with a capacity of 200,000 tonnes annually.

With the second plant being planned, Lee said it would increase the total capacity in the US to 400,000 tonnes annually.

He said IOI Corp was eyeing the East Coast to set up the new plant because it has the second highest concentration of food ingredient manufacturers, after Chicago.

However, he added that the group would also target to expand their operations in the West Coast in the future.

On IOI Corp operations, Lee said the group was on an acquisition trail, with an appetite for more lands for its plantation and property development divisions, as well as stakes in other companies, other than expanding its plants both locally and overseas, as part of its strategy for group expansion.

The group, which had recently acquired several Indonesia-based palm oil plantation companies for RM289 million, was raising funds to finance its acquisition activities, via the issuance of convertible bonds. IOI Corp had issued two convertible bonds previously, raising a total of US$720 million (RM2.38 billion).

Speaking to reporters after the company’s EGM here yesterday, its group executive chairman Tan Sri Datuk Lee Shin Cheng said: “Continuous acquisition is one of our agendas. I am interested in everything, as far as business is concerned.”

At the company EGM, shareholders approved the up to US$600 million convertible bonds issue by its wholly owned subsidiary IOI Resources (L) Bhd. Lee said: “We raise funds not only for expansion, but also for acquisition. We are looking at buying more land here or in other countries.”

However, IOI Corp had not targeted to make any acquisitions yet, he said, adding that the funds raised from the bonds issuance would be on a standby mode, in the event any acquisitions cropped up.

Meanwhile, Lee dismissed reports that IOI Corp was acquiring a substantial stake in Unico-Desa Plantations Bhd as rumours, and said he had not received any propositions from the latter regarding the stake sale.

He said: “I have not received any offers, but if the opportunity arises and the offer is reasonable, I will consider it.”

It was reported in October that IOI Corp was seeking its board’s approval to buy a substantial stake in Unico-Desa, as part of its plan to grow its plantation business. Lee added that the group also did not intend to privatise its property development arm IOI Properties Bhd for the moment, contrary to analysts’ reports.

The group was also finalising plans to expand its operations in Johor, which would concentrate on creating value-added products.

Lee Shin Cheng said: “Currently, we have three businesses in Pasir Gudang — refinery, specialty fats and oleochemical — and we want to make use of our unique position to create a synergy between these businesses, to come up with value-added products.”

He added that the group expected its profitability to be enhanced by the second half of fiscal year 2009, following the completion of its acquisition of plantation lands in Indonesia.

On the possibility of the government revoking licences among companies that did not use them to produce biofuel, Lee Shin Cheng said it would not affect IOI Corp’s businesses.

He added that the group had not embarked on producing biodiesel, as it was not profitable, due to high crude palm oil (CPO) prices. “It is still difficult to convert CPO into biodiesel because of the high prices, and it might even increase again next year,” he said.

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