KUALA LUMPUR: Felda Global Ventures Holdings Bhd (FGV) may be the largest palm oil company in the country, helped by the support of small-scale farmers, but IOI Corp Bhd has the strongest business profile, owing to its highly efficient upstream operations and integrated business model, said Moody’s Investors Service.

In a research note yesterday, Moody’s senior analyst Jacintha Poh and associate analyst Diana Beketova assessed three rated companies in the Malaysian palm oil sector — Sime Darby Bhd, IOI and Genting Bhd, which owns 53% of Genting Plantations Bhd — to find out how they stack up against FGV, the clear industry leader in size.

It is worth noting that the Big Four planters, FGV, Sime Darby, IOI and Genting, accounted for around one-third of Malaysia’s total crude palm oil (CPO) production over the last three years.

Moody’s opined that FGV is likely to remain the market leader in terms of output and scale as its annual CPO production was more than three million tonnes between 2013 and 2015.

“[FGV has] a lead of more than 500,000 tonnes over [the] second-largest producer, Sime Darby, and more than four times larger than IOI’s and Genting Plantations’ output. We expect FGV will maintain its production leadership position as Sime Darby’s efforts to increase its CPO production through improving harvesting yields and productivity will likely be realised after 12 months,” said Poh and Beketova.

Interestingly, Moody’s pointed out that IOI’s upstream operations are the most efficient one, as it consistently generates the highest fresh fruit bunch (FFB) yield among local plantation groups.

“In financial year 2015 [ended June 30, 2015], IOI achieved a FFB yield of around 24 tonnes, versus Malaysia’s industry average of around 18 to 19 tonnes. Over the next six to 12 months, we expect all four companies to generate lower FFB yields due to poor weather conditions,” they said.

While a strong El Nino phenomenon where dry weather and haze conditions will impact growth of oil palms in Southeast Asia, Moody’s is of the view that IOI will maintain its lead in FFB yield as 55% of its trees are at their prime age compared with 45% for Sime Darby, 30% for Genting Plantations and 14% for FGV.

FFB yield is dependent on various factors including the weather, fertiliser applications as well as the age and stress of oil palm trees. Generally, a palm tree at its prime age of between eight and 18 years will produce the most FFB. Moody’s also highlighted that IOI’s business model is the most integrated, which supports its financial stability.

“IOI generates over 80% of its total revenue from downstream operations, which provide diversification to the single-commodity business model across the agricultural value chain. We believe an integrated company is less exposed to CPO price cyclicality and has more stable, albeit much lower profit margins. IOI’s leverage ratios exhibit more stability, helped by resilient profit margins,” said the analysts.

Commenting on the export and import duties, Moody’s said the uncertainty in direction of various countries’ taxation regimes will continue to weigh on the crude and refined palm oil sectors, as such duties can affect CPO prices and in turn the profitability of palm oil producers.

“We expect producers that sell most of their CPO domestically to be less impacted. Meanwhile, amid growing consumer awareness and regulatory demands for sustainable production, we expect companies with certification from the Roundtable on Sustainable Palm Oil to be best placed for growth,” they said.