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Declaration of Authenticity
This is to declare that the paper titled is an authentic work originated from me under the
guidance of Dr. Harwinder & Mr. Francis.
This paper was carried out in fulfilment of submission for Financial Analysis & Management
module of Master in Business Administration for Executives offered by Westminster
International College, Subang.
The contents found in this paper are solely based on research and case study and I have not
submitted to any other institution.
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Executive Summary
This written report examines two potential plantation-based organizations, IOI Corporation
Bhd and KLK Bhd in terms of its financial performance for year 2013 and 2014. Besides that,
the report dictates on the impact of recent economic conditions on both companies as well.
Their business model was reviewed along with their recent financial performance to conclude
and recommend for acquisition.
The introduction section of the report gives a brief summary of both companies and stating
clearly the objectives of the whole analysis. In the financial analysis segment, ratio analyses
were conducted on both companies according to their published financial reports such as
Comprehensive Income Statement, Balance Sheets and Cash Flow Statement.
From the research and analysis, critical evaluations are done especially on the risk exposure
and financial performances of both companies. By using these evaluations, a conclusion may
be derived to advice the higher management in making a wiser decision for acquisition.
The result of this analysis along with recommendation would be helpful in deciding the
acquisition and will aid in the presentation towards RSPO Roundtable Conference.
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Contents
Declaration of Authenticity..................................................................................................................... 1
Executive Summary ................................................................................................................................ 2
List of Appendices .................................................................................................................................. 5
List of Charts........................................................................................................................................... 6
List of Tables .......................................................................................................................................... 7
List of Abbreviations .............................................................................................................................. 8
Objectives ............................................................................................................................................... 9
Investment Decision of FGV over Rajawali Group .............................................................................. 10
Company Background .......................................................................................................................... 11
IOI Corporation Bhd ......................................................................................................................... 11
Kuala Lumpur Kepong Bhd .............................................................................................................. 12
Ansoffs Growth Matrix ................................................................................................................... 13
Increase in Value and Distribution network ..................................................................................... 13
Economies of Scope.......................................................................................................................... 13
Competitive Advantage .................................................................................................................... 13
Impact of Current Economic Conditions towards both Companies...................................................... 14
US Economy Growth strengthens USD ............................................................................................ 14
Global Price for CPO Declining ....................................................................................................... 14
ECB launch on QE plans .................................................................................................................. 14
CPO Export Taxes in Malaysia re-imposed ...................................................................................... 15
Financial Performance and Strategic Fit Evaluation of IOI and KLK .................................................. 16
Limitation on Financial Analysis ...................................................................................................... 16
Distorted Figures of IOI ................................................................................................................ 16
Shareholder Ownership ................................................................................................................. 16
Inconsistence Data Comparison .................................................................................................... 16
Ratio Analysis of both IOI and KLK ................................................................................................ 16
Profitability Ratio.......................................................................................................................... 16
Liquidity Ratios ............................................................................................................................ 18
Efficiency ...................................................................................................................................... 20
Capital Structure ........................................................................................................................... 21
Investors ........................................................................................................................................ 22
Strategic Fit of both companies towards FGV Business Model ........................................................... 23
IOI Strategic Fit towards FGV .......................................................................................................... 23
KLK Strategic Fit towards FGV ....................................................................................................... 24
Acquisition Recommendation ........................................................................................................... 25
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List of Appendices
Appendix 1 FGV Business Model 2015 - 2020 ....................................................................... 34
Appendix 2 FGV Crop Age Profile ......................................................................................... 34
Appendix 3 IOI Crop Age Profile ............................................................................................ 35
Appendix 4 KLK Business Model ........................................................................................... 36
Appendix 5 IOI Business Model.............................................................................................. 37
Appendix 6 MYR vs USD ....................................................................................................... 38
Appendix 7 KLK Crop Age Profile ......................................................................................... 38
Appendix 8 Palm Oil Price vs USD Price ............................................................................... 39
Appendix 9 Crude oil Price 5 Years Trend .............................................................................. 39
Appendix 10 KLK's Top 30 Shareholders ............................................................................... 40
Appendix 11 IOI Comprehensive Income ............................................................................... 41
Appendix 12 IOI Financial Position ........................................................................................ 42
Appendix 13 KLK Comprehensive Income ............................................................................ 43
Appendix 14 KLK Financial Position...................................................................................... 44
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List of Charts
Chart 1 Gross Profit Margin of IOI & KLK for FY2013 & FY2014 ...................................... 16
Chart 2 Operating Profit Margin for IOI & KLK for FY2013 & FY2014 .............................. 17
Chart 3 Expenses Margin for IOI & KLK for FY2013 & FY2014 ......................................... 17
Chart 4 Marketing & Selling Margin for IOI & KLK for FY2013 & FY2014 ....................... 18
Chart 5 Cost Structure Changes for IOI & KLK for FY2013 & FY2014 ............................... 18
Chart 6 Current Ratio for IOI & KLK for FY2013 & FY2014 ............................................... 19
Chart 7 Quick Ratio for IOI & KLK for FY2013 & FY2014 .................................................. 19
Chart 8 Debtor Collection in Days of IOI & KLK for FY2013 & FY2014 ............................ 20
Chart 9 Creditor Payment in Days of IOI & KLK for FY2013 & FY2014 ............................. 20
Chart 10 Gearing Ratio of IOI & KLK for FY2013 & FY2014 .............................................. 21
Chart 11 Interest Cover of IOI & KLK for FY2013 & FY2014 .............................................. 21
Chart 12 EPS of IOI & KLK for FY2013 & FY2014.............................................................. 22
Chart 13 ROCE of IOI & KLK for FY2013 & FY2014 .......................................................... 22
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List of Tables
Table 1 PV ............................................................................................................................... 27
Table 3 Cash Surplus ............................................................................................................... 28
Table 4 NPV ............................................................................................................................ 28
Table 5 IRR .............................................................................................................................. 28
Table 6 Payback Period ........................................................................................................... 29
Table 7 Profitability Ratios ...................................................................................................... 45
Table 8 Liquidity Ratios .......................................................................................................... 46
Table 9 Efficiency Ratios......................................................................................................... 46
Table 10 Capital Structure Ratios ............................................................................................ 47
Table 11 Investors Ratio .......................................................................................................... 47
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List of Abbreviations
FGV
CPO
IOI
RSPO
FY
IOIPG
GBI
IOI
PT Eagle High
GSB
M&A
R&D
OER
US
USD
MYR
ECB
QE
CCE
AR
CL
AP
EBIT
EPS
GPM
OPM
EM
IMTN
VC
PH
LLA
WACC
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Objectives
The objectives of this assignment are explained as below:
To examine critically on IOI and KLK business portfolios in identifying the strategic
fit as compared to FGVs Business Model.
To establish the main change on economic drivers and their impact on present and
future of both IOI and KLK.
To examine critically on IOI and KLKs financial performance and its strategic fit
against FGVs business model of 2015-2020.
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Company Background
IOI Corporation Bhd
IOI Corporation Berhad started off with industrial gas manufacturing then venture to property
industry followed by oil palm plantation industry. IOI has more than 30,000 employees that
come from more than 23 regions over the world (Lim, 2015). It operates on several business
clusters which are plantations, resources manufacturing and property development. Its major
revenue earning contributing between 55 to 60% comes from its core business which is its
plantation sector followed by property development division. IOI is also part of RSPO and its
palm value chain comprises both upstream and downstream where upstream works on
seeding, planting and extraction of crop oil till downstream activities which is also known as
resource-based manufacturing division. This division operates and manufactures palm oil
refining, oleo chemical engineering and production of fats and specialty oils. On the other
hand, its property subsidiary, IOIPG has outstanding achievement and is ISO9001:2008
standards and GBI certified. Based on IOIs plantation sector financial performance,
comparing its FY2013 and FY2014; it has an increment of 12% operating profit in its
upstream and 30% increment in its downstream division. IOI adapts vertical integrated
business model where the upstream products are used as resources in downstream
manufacturing. This will add value to the products that are made along the value chain.
According to Butler, IOI is ranked 6th in the world in terms of sustainability whereas KLK is
ranked at 9th place (Butler, 2014).
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Economies of Scope
It is considerably to be in greater economies of scope as acquisition will bring more assets,
technology, resources and experiences which then results in better quality and efficiency.
However, there may be potential risk as consumers are already familiar with these products
and there are many substitution products in the market. Thus, the marketing strategy used
must be effective in gaining customer trust.
Competitive Advantage
Diversification of business will eliminate a competitor in the market as both IOI and KLK is
specialist in plantation industry as well. Therefore, the diversification that achieves
economies of scope would then give FGV a competitive advantage of being a bigger and
stronger firm in terms of sharing assets, customers, knowledge and production.
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Emerich (The Star, 2015). With the growth of euro zone economy, KLK as the key and
strategic supplier would benefit from it as demands would increase. IOI on the other hand
would benefit from the growth of euro-zone economy as IOI Loders Croklaan in Europes
research and manufacturing company would have increased revenue as well.
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IOIs FY ended on 30th June while KLKs ended on 30th September. Inconsistency in
comparison of both companys data may lead to inconsistent and inaccurate evaluations
Chart 1 Gross Profit Margin of IOI & KLK for FY2013 & FY2014
The Gross Profit Margin of IOI is 18.12% in 2013 while 22.53% in 2014. It has increased by 4.41%.
This is mainly due to higher CPO and palm kernel prices as well as higher percentage of FFB
productions thus better revenue. This indicates that IOI is in a healthy financial status.
For KLKs GPM, it is 21.32% for 2013 and 19.07% for 2014 which is a decrease. Although there is
an increase in its revenue, the cost of sales had a dramatic increase as well which affects its gross
profit margin. It may be due to higher transportation cost in remote areas of Central Kalimantan and
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East Kalimantan. Furthermore its profit is affected as well due to chronic theft in its most productive
region, Indonesia.
Chart 2 Operating Profit Margin for IOI & KLK for FY2013 & FY2014
IOI has an increase in its operating profit margin of a slight 0.9% whereas KLK decreased its
operating profit margin by 1.29%. IOIs improved OPM is due to its higher sales volume and margins
from oleochemical section.
KLK itself vice versa had a decrease in its OPM. This may be the result of ineffective cost
management whereby its distribution costs and administration expenses had increased in a year.
Chart 3 Expenses Margin for IOI & KLK for FY2013 & FY2014
Both GPM and OPM lead to this Expenses Margin where GPM OPM. IOI has an increase in its EM
from 4.03% to 7.61%. This is because IOI has a stunningly increased profit in 2014 as compared to
2013 while its OPM did not changed much. As for KLK, it was 7.46% in 2013 then dropped to 6.50%
in 2014. This is because it had a poorer GPM in 2013 which caused the changes.
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Chart 4 Marketing & Selling Margin for IOI & KLK for FY2013 & FY2014
This further depicts the expenses in terms of marketing and selling. There was a decrease in
IOIs by 0.35% which is relatively good result of cost efficiency mainly due to lower
expenses on its fair value and realised fair value losses of investments. As for KLK, it has a
great decrease as well at 0.48%. It actually has a slight increase in its expenditure, but this
may be offset by its higher sales revenue as compared to previous year.
Chart 5 Cost Structure Changes for IOI & KLK for FY2013 & FY2014
IOI has an effective decrease in its administration expenses since it has an internal streamline
of its operation, yet with lower sales; the expenses had seen an increase to 4.17%. KLK itself
has a significant drop of 0.70% since its administration expenses actually remained the same
but had higher sales.
Liquidity Ratios
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Chart 6 Current Ratio for IOI & KLK for FY2013 & FY2014
IOIs current ratio has dropped from a stunning 7.26 to 2.11. There was a major decrease in
current asset because of the demerging of IOIPGs into separate entities. As for KLK, there is
also a decrease in its current ratio of 0.51 with a slight increment in its current assets while an
increase in its current liabilities especially in its borrowings.
Chart 7 Quick Ratio for IOI & KLK for FY2013 & FY2014
Quick Ratio depicts that IOI has decreased to 1.50 in 2014 which is due to better funds and
deposits yet a rather higher current liabilities due to high borrowings whereby IOIs subsidy,
IOI Investment started EMTN Programme which is of USD1.5Billion. On the other hand,
KLK also has a drastic decrease to 1.07 in year 2014. It has a lower cash equivalent but
higher current liabilities as well due to borrowings to support its IMTN Programme.
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Efficiency
Chart 8 Debtor Collection in Days of IOI & KLK for FY2013 & FY2014
Chart 9 Creditor Payment in Days of IOI & KLK for FY2013 & FY2014
Based on the two ratios, IOI has an unhealthy efficiency ratio as it will take 35.6 Days to
collect from debtors while only giving itself 34.3 Days to settle all its outstanding payments.
However, this was deemed to be better compared to 2013. KLK itself has improved debtor
ratios of 36.1 Days with 40.5 Days given to it to clear off its debts.
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Capital Structure
Chart 10 Gearing Ratio of IOI & KLK for FY2013 & FY2014
In year 2014, IOI has an increased gearing ratio from 52.60% to 120.70%. This is due to the
changes in share reserves whereby IOI re-purchase some of their shares from the open market
by their own funds and a loss in its foreign currency translation. This represents that IOI has a
greater risk in terms of financial leverage. KLK itself has an increment as well which hits
35.60% in year 2014. The increment is most likely caused by its borrowings as mentioned
earlier.
Chart 11 Interest Cover of IOI & KLK for FY2013 & FY2014
Despite of an increment in the taxes, both IOI and KLK had reduced interest cover which is
caused by increased EBIT. This means that both IOI and KLK have the ability to cover the
interests charged over their debts.
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Investors
IOIs EPS value was taken only from its continuing operations. It had a slight decrease due to
its profit attributed had decreased. As for KLK, it had an increment to 0.931 because they had
an increment in its profits as compared to 2013.
IOI increased its ROCE drastically to 11.6% as it had a major drop in its total assets due to its
demerger of IOIPG which then makes IOI being more efficient use on its single entity. KLK
increased slightly to 10.90% due to its higher operating profit and total assets but
achievements are not as comparable to IOI.
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Acquisition Recommendation
After analyzing both companies in terms of their financial performances and strategic fit
towards FGVs Business Model, it is recommended that FGV would acquire IOI. This is
because IOI has an amazing crop age profile which FGV is currently critically in need of
upstream supplies. Besides that, its demerger activity would allow IOI itself to focus on its
single entity which is plantation, realizing quality control. Its manufacturing division also
gives manufacturing excellence and with such combination to FGV, it would benefit FGV
and push the organization to a brand new level. Acquisition would also bring more assets
such as unutilized factories to FGV for its perusal. As such, FGV have a bigger output on
FFB, more capacities to manufacture and an even wider distribution network. Although KLK
has its established distribution network in Europe, the Euro zone economy is still unstable
despite efforts have been taken into place.
Furthermore, FGV is looking for new land banks and IOI has a remaining of 25,000ha and
there are plans to plant in recent future. KLK on the other hand does not have free land banks
and 7% of their total land banks will only be free for replanting after they cease their rubber
plantation division, which may take up to few years at least.
Based on the financial analysis, IOI also have a better control on its expenses as compared to
KLK. As such, it may strengthen FGVs assets and at the same time, neutralizes FGVs
expenses margin since being said as extravagance spending nature when acquiring others.
The ROCE indicator shows that IOI being stronger ever since becoming a single entity
whereas KLK seems to be at stagnant. As for the shares, if FGV acquired IOI, FGV will be
the substantial shareholders and will be stronger against other shareholders in FGVs like
Rajawali Group.
Nonetheless, during the period where CPO prices are dropping low, IOI still manage to grow
its profit margin while other competitor plantations like KLK suffered a loss, it means that
the organization is strong and has capability in it.
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for FGV to predict on its price. Thus, FGV has to consider if an LLA or a total acquisition
over IOI would be cost saving.
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Table 1 PV
The Cost of Capital for this project which is computed by the Finance Department would be
15%.
PV = Future Cash Flow @ tn/ (1+r)^n
Where r = Required Rate of Return
N = time period
Discounting Factor
= 1/(1+r)^n
= 1/1.15 = 0.8696
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Table 3 NPV
Profitability Index
This concludes if the NPV is strong against upfront investment.
Table 4 IRR
This means that IRR = 26% provides a margin of safety = 26% - 15% Required Return = 11%
Payback Period
This shows the number of years needed in order to recover the invested initial capitals.
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Benefits of NPV
Gives the thoughts of value of money today is worthy than the same amount of money
received in future.
Weakness of NPV
As long as its value is greater than zero then it is a profitable investment. It may be
true but for NPV itself, it does not calculate the duration to achieve the NPV value
greater than zero.
Benefits of IRR
IRRS will not add each other which are good for evaluation, unlike NPV.
Limitations of IRR
As long as its value is greater than WACC, IRR stands to say that the project is
acceptable. Yet if the discounted rates changes annually, comparison will be distorted.
Limitations of IRR
No time period specified on when investor can achieve positive cash flow.
Ignoring cash flows that may occur after the payback period as it does not calculate
further.
Does not let the investors know what happens after the payback period has reached.
(Money-Zine, 2015)
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Conclusion
The report has concluded the objectives along with ratio analysis and evaluation on
investment appraisals.
It has come to a conclusion that FGV should acquire IOI as it has strategic fit towards FGVs
Business Model. Besides this, the collaboration of this two will add value to FGVs value
chain due to IOIs manufacturing excellence and outstanding crop age profile which is what
FGV critically in need to improve their crop profiles.
The investment appraisals may give decision makers figures and assist in decision making.
However, there may be contemporary issues that may distort the decision outcomes such as
social issues or being too overconfident in an acquisition decision.
Nevertheless, financial analysis and strategic fit plays an important role in providing decision
makers figures and understanding on the acquisition.
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Appendix
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