IOI Corporation Berhad is one of the largest integrated plantation companies. IOI is valued at about RM27.6 billion and is one of the top 30 largest companies listed on Bursa Malaysia.
Its founder, the late Tan Sri Dr Lee Shin Cheng passed away recently in June 2019. His rise from an ice-cream seller to a plantation and property tycoon is a classic rags-to-riches story. I took the chance to attend the annual general meeting of one of his legacies, IOI.
Here are nine things I learned from the 2019 IOI Corporation AGM:
1. IOI recorded a net profit from continuing operations of RM617.6 million in 2019. However, excluding other operating income – which comprised mostly of fair value gains – and forex movements in deposits and borrowings, IOI made a net loss from continuing operations of RM131.1 million. The result is mainly due to lower contributions from the plantation segment because of the generally low crude palm oil price; prices hit a low in December 2018 and then hovered between RM1,800 and RM2,200 per metric tonne for most of 2019. On the flip side, the downstream business benefited from low prices and achieved a 26.4% improvement in its operating profit at RM445.2 million.
2. CEO Dato’ Lee Yeow Chor (the late chairman’s son) explained to the Minority Shareholder Watch Group (MSWG) that 30%-owned associate, Loders Croklaan Group B.V. , still fits IOI’s integrated business model as a specialty fat business. Although IOI did not intend to sell at first, the management disposed a 70% stake in Loders to Koninklijke Bunge B.V. due to the EV/EBITDA multiple of 13 times that was offered. Through Bunge’s network, Loders has managed to expand its portfolio from palm oil specialty fats into soybean oil and sunflower oil to target more customers. IOI achieves cost saving of about US$70-80 million annually post-acquisition and will continue to supply palm oil to Loders as negotiated prior to the disposal.
3. IOI proposed a resolution to distribute RM27.4 million in the form of gratuity payment to the late chairman for his 38 years of service and contributions to the company. IOI did not pay any retirement benefits to the late chairman from its existing retirement scheme as the scheme is not applicable for management and directors. According to the board, the gratuity payment was discussed by independent directors in the absence of related parties in alignment with the Companies Act 2016. The gratuity payment was mentioned as a ‘one-off discretionary and non-contractual’ retirement benefit by the CEO. Meanwhile, the late chairman’s estate decided to voluntarily waive his bonus entitlement that amounted to RM13.1 million in 2019. MSWG pointed out that none of the independent non-executive directors were members of the Executive Share Option Scheme committee to provide checks and balances. The CEO explained that the parameters were set by the governance, nominating, and remuneration committee while nomination of members was approved by the committee.
4. The Employees Provident Fund (EPF) stated that any recognition and respect for the late chairman should not be in monetary or tangible form. A representative from EPF urged the board to reconsider the resolution. The CFO explained that the payment was computed at 1.5 months per year for 38 years of service by the late chairman based on his last-drawn monthly salary of RM480,000. According to the CFO, such gratuity payments are not new among government-linked companies. In response as to who would benefit from such a payment, the CFO only mentioned that the late chairman had left behind his wife, six children, and 12 grandchildren.
5. Subsequently at the meeting, the CEO announced that the estate would donate half of the gratuity payment to charity if the resolution was passed. The CEO of MSWG pointed out that the money would be donated by the estate and not on behalf of IOI. Therefore, the donation should not be considered as part of the company’s corporate social responsibility. Secondly, the late chairman is no longer around to receive the payment. In his opinion, the amount is better paid as a special dividend to shareholders as both minority shareholders and the estate of the late chairman — which holds substantial stake in IOI — would benefit. As an interested party, the Lee family did not vote in the resolution. Consequently, the resolution was carried forward by garnering 52.6% of the remaining votes from shareholders.
6. EPF highlighted that the CEO’s salary as a percentage of net profit increased to 2.5% in 2019 (from 1% a year ago) and asked if the board intends to establish a cap. The CFO said that the fixed compensation of the CEO/executive chairman would be maintained at a maximum of 1% of net profit unless IOI’s net profit increases significantly, at which point the percentage would be lowered. Based on this, I personally inferred that variable bonuses would be excluded from this cap and effectively had no limit. Moving forward, net foreign translation gains and losses from borrowings or deposits would be excluded from the ratio calculation above. The EPF representative then requested IOI to publicly disclose any relevant CEO/employee pay ratios in the future.
7. A shareholder was curious about the impact of the Indian ban on Malaysian palm oil. The CEO clarified that there was no official stand from the Indian government although a vegetable oil trade body there advised its members to refrain from buying Malaysian palm oil.IOI’s revenue contribution from customers in India remained negligible in 2019. IOI only sold palm oil products to India indirectly via customers like Cargill and Bunge. The majority of revenue was derived from customers in Japan, Korea, Europe, and the U.S. The CEO views the action as a zero-sum game and a short-term disruption.
8. The same shareholder enquired about the impact of the European Union’s restriction and ban on palm oil biofuel by 2030. The CEO explained that the EU consumes 5% of the total global palm oil consumption, which is equivalent to about 3.5 million tonnes of palm oil[U16] . The organic growth of palm oil consumption worldwide at 2.5% annually will exceed and compensate for the loss from the EU’s ban. In 2019, Europe contributed to 25.7% of IOI’s revenue. He reckoned the ban will affect IOI only in the short term.
9. The CEO explained to another shareholder that the past-prime age for oil palms is above 21 years old. Past prime palms will continue producing fruits until they reach 30 years old.
Replanting is done in stages when they reach 25 years old to optimise for sustainable harvests in the years to come. IOI spends about between RM120 million and RM180 million on replanting annually. IOI will also spend RM80 million in stages over the next five years to to mechanise infield collection of fresh fruit bunches.
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