IOI Corporation Berhad(thereafter IOI) and Kuala Lumpur Kepong Berhad(thereafter KLK) are both well known Malaysian multinational companies which are involved in plantation, property, and oleochemicals manufacturing. They are competitors to each other.
Based on the ratio analysis on liquidity and asset management efficiency, debt financing and coverage, profitability-overall efficiency, performance and market ratio, KLK has better management than IOI.
Through the additional research on IOI, it faces weather abnormalities that will affect the production of vegetables oil. So, it is suggested to conduct research and development on this matter. It is found that KLK is lack of efficiency in assets management. Thus, it is recommended that KLK to acquire more assets by enter into conditional agreements. As investors, we should invest in KLK as it has stronger capability in debt financing, profit generation, and it achieves better market performance.
2.0 Background of the Companies
IOI is a home grown multinational company which was incorporated on 31 October 1969. IOI started off from industrial gas manufacturing and later in 1982 ventured into property development, followed by oil palm plantations in 1985. With just short span of 30 years, it has established itself as the leader in its core business of Plantations, Property Development & Investment, and Manufacturing of oleochemicals and specialty fats. It is internationally known as a leading global integrated palm oil player and it is one of the largest plantation groups in Malaysia. Besides, it is also the largest vegetable oil based oleochemical manufacturer in Asia. IOI Properties was ranked second in The Edge's Malaysia Top 10 Property Developers Award 2005. As at June 2009, IOI Group has more than 30,000 employees of more than 23 different nationalities in 15 countries. In the international level, its main rivals are Indonesia's PT Sinar Mas Agro Resources Tbk and Singapore-listed Wilmar International Ltd. In Malaysia, its competitors are KLK, Felda, United Plantations, and Sime Darby.
KLK was incorporated in Malaysia on 1973. It is a multinational company involved in plantation, manufacturing, property development and retailing. Plantation remains as KLK's core business. It is the third-largest palm oil producer in Malaysia. It has expanded downstream into resource-based manufacturing, including oleochemicals, rubber processing, and cocoa processing. In 1990, KLK has ventured into property development in capitalising on the strategic location of its land bank in Malaysia. KLK also involved in the manufacture and retail of personal care products, home fragrances toiletries, and fine foods through a worldwide brand, Crabtree & Evelyn. The main competitors of KLK are Astra Agro Lestar, Indofood, IOI and Sime Darby.
3.0 Ratio Analysis
3.1 Ratio analysis over time
IOI
1. Liquidity (short-term solvency) & Asset management efficiency
2008
2009
Current/Liquidity ratio
=
= 3.11
=
= 4.70
Current ratio is used to indicate company's ability to pay back its short-term liabilities with its short-term assets. Current ratio for IOI increases 1.59 which means its capability in paying obligation has increased.
Quick/acid-test ratio
=
= 2.10
=
= 3.41
Quick ratio is used to indicate whether a company has enough short-term assets to cover its immediate liabilities without selling inventory. Quick ratio for IOI increases 1.31 indicates IOI's capability in paying its obligation without selling inventories increase.
Accounts receivable turnover
=
= 8.66
≈ 8
=
= 10.94
≈ 10
Accounts receivable turnover is used to measures how many times receivables are collected during a year, on average. Accounts receivable turnover for IOI increase 2. The higher the ratio, the more efficiency in account receivable collection.
Inventory turnover
=
= 4.37
≈ 4
=
= 6.73
≈ 6
Inventory turnover show that how many times a company's inventory is sold and replaced over a period. Inventory turnover increases 2 shows that IOI has more efficiency in managing and selling inventory.
2. Debt financing and coverage
2008
2009
Debt ratio
=
= 0.4579 / 45.79 %
=
= 0.4511 / 45.11 %
Debt ratio is used to show the proportion of all assets that are financed with debt. Both years' debt ratio which less than 1 indicate that IOI has more assets than debt.
Long-term debt to total capitalization
= = 0.3699 / 37 %
=
= 0.4034 / 40.34 %
Long-term debt to total capitalization is used to measure the extent to which long-term debt is used for permanent financing. The ratio increase slightly of 3.34%. IOI should be careful because the high debt-to-capital ratio shows that weak financial strength because the cost of these debts may weigh on the company and increase its default risk.
Debt to equity
=
= 0.8448 / 84.48%
=
= 0.8218 / 82.18%
Debt to equity is used to measure debt relative to equity base. Although the ratio is decrease 2.3%, but it is still high. The higher of the ratio indicates that a company has been aggressive in financing its growth with debt.
Times interest earned
=
= 16.61
=
= 8.53
Times interest earned is used to indicate how many times interest expense is covered by operating earnings. Times interest earned is decrease of 8.08. A low ratio indicates that fewer earnings are available to meet interest payments.
3. Profitability - overall efficiency and performance & market ratios
2008
2009
Net profit margin
=
= 0.1644 / 16.45 %
=
= 0.0728 / 7.28 %
Net profit margin indicates that profit generated after consideration of all expense and revenues. The decrease of 9.17% in net profit margin indicates that the profit IOI made from every RM1 of sales become much fewer.
Return on total assets
=
= 0.1793 / 17.93 %
=
= 0.097 / 9.7 %
Return on total assets is used to measure overall efficiency of firm in managing assets and generating profits. However, IOI's return on asset is decrease 8.22%. It shows IOI's efficiency in asset management decrease.
Earnings per common share
=
= 36.85cent
=
= 16.62cent
Earnings per common share are used to indicate return to common stock shareholder for each share owned. It is important to determine a share's price. Earnings per share have dramatically decreased 20.23cent.
Dividend payout
=
= 0.4613 / 46.13%
=
= 0.4813 / 48.13 %
Dividend payout is used to indicate percentage of earnings paid to shareholders. The dividend payout slightly increases of 2%.
KLK
1. Liquidity (short-term solvency) and asset management efficiency
2008
2009
Current ratio
=
= 2.07
=
= 2.56
KLK's capability in paying its obligation has increased.
Quick or acid-test
=
= 1.31
=
= 1.86
The increasing of the ratio indicates KLK is more capable to pay its obligation without selling inventories in 2009.
Accounts receivable turnover
=
= 12.59
≈ 12
=
= 10.6
≈ 10
The decreased ratio shows that KLK has less efficiency in collecting account receivable in 2009.
Inventory turnover
=
= 4.48
≈ 4
=
= 5.34
≈ 5
In 2009, KLK has more efficiency in managing and selling inventory.
2. Debt financing and coverage
2008
2009
Debt ratio
=
= 0.3255 / 32.55 %
=
= 0.3093 / 30.93 %
Although the debt ratio decreases 1.62%, KLK still has more assets than debt.
Long-term debt to total capitalization
=
= 0.1691 / 16.91 %
=
= 0.1926 / 19.26 %
The higher of debt-to-capital ratios shows weak financial strength. Although the ratio increase, it is still low than 20%.
Debt to equity
=
= 0.4826 / 48.26 %
=
= 0.4479 / 44.79 %
Debt to equity has decrease from 3.47%. KLK has less aggressive in financing its growth with debt In 2009.
Times interest earned
=
= 25.37
=
= 23.02
A low ratio indicates that fewer earnings are available to meet interest payments.
3. Profitability - overall efficiency and performance & market ratios
2008
2009
Net profit margin
=
= 0.1387 / 13.87 %
=
= 0.0965 / 9.65 %
Decreasing of the ratio shows that the capable earning generated from sales has decrease.
Return on total assets
=
= 0.1793 / 17.93 %
=
= 0.1031 / 10.31 %
The decrease of ratio indicates the less efficiency in managing asset.
Earnings per common share
=
= 97.71 sen
=
= 57.5 sen
The significant decrease of 41.15% shows the return to common stock shareholder for each share has decrease.
Dividend payout
=
= 0.5619 / 56.19 %
=
= 0.6957 / 69.57 %
The earnings paid to shareholders have increase 13.38%.
3.2 Ratio analysis over companies
2008
2009
1. Liquidity (short-term solvency)& asset management efficiency
IOI has higher current and acid-test ratio. KLK has higher accounts receivable turnover ratio. Inventory turnover for both companies are more or less same. Therefore, we might conclude that IOI has better short term liquidity while is KLK has more capability in managing asset.
IOI has higher percentage in total four ratios if compare with KLK. Therefore, we can conclude that IOI is more efficient in short term solvency and asset management.
2. Debt financing& coverage
KLK has lower debt ratio, long term debt to total capitalization and debt to equity ratio while IOI has lower of times interest earned. Therefore, KLK has stronger debt financing policy.
Same as year 2008, KLK has stronger debt financing capability than IOI.
3. Profitability - overall efficiency and performance & market ratios
Net profit margin for IOI is higher. Ratio return on assets for both companies is same. Earnings per common share and dividend payout for KLK are higher. KLK has more profitability efficiency and better performance in market.
KLK has higher percentage in all ratios. KLK is more efficient in generate profit and has better performance in market.
Overall, based on the ratio analysis, KLK has better management than KLK.
4.0 Additional Information & Critical Issues
IOI
By referring the appendix 1, IOI Corporation is facing some risk on its operation in year 2010. Firstly, there is a reversal in crude oil price trend resulting in reversal of palm oil and other vegetable oils price trend. Besides that, IOI Corporation faces the weather abnormalities which will resulting in an over- or under-supply of vegetable oils
Change in emphasis on implementing global bio-fuel and trans-fat policies also influence the income revenue of the company. IOI Corporation facing a slow global economic recovery which will cause lower demand for palm oil. All the issues stated are the risk might face by the IOI Corporation in the current year.
KLK
According the appendix 2, KLK has entered into a conditional S&P agreement with Croda GmbH and Novarom GmbH, Croda Chemicals International Limited and Croda International Plc to acquire the entire partnership interests of Uniqema GMBH & Co KG (UG) and certain business assets used in or for the business carried out by UG at its oleochemical site at Emmerich, Germany, for a cash consideration of €60.5m (or RM252.5m).
Although the acquisition costs the company a lot, based on the financial report KLK should not have any problems on financing the acquisition. The acquisition is conditional on the approval of the German Federal Cartel Office and the approval of Bank Negara Malaysia and is expected to be completed by end-FY09/10. KLK expects to fund this acquisition with its existing cash reserves and bank borrowings. The consideration is based on an enterprise value on a debt free cash free basis and is subject to adjustments following the completion if:
(i) the working capital calculation differs from €25.4m;
(ii) there is cash, borrowings (inclusive of net shareholder advances), or current taxation liabilities not normally included within working capital; and
(iii) the gross pension liabilities (comprising unfunded pension schemes) estimated at €35.2m, which is fully deductible from the price, changes
5.0 Conclusion & Recommendations
IOI is facing the weather abnormalities which have brought the bad impact to the supply of vegetable oils. It is recommended that IOI should carry on a research and development project in order to solve all these problems. Besides that, IOI can join the other companies' research and development project or invite the related companies to join in their project in order to lower the burden of the cost.
Based on the financial ratio, the liquidity and asset management efficiency for KLK is not so capable compare with IOI. Thus, it is recommended that KLK should be more efficient in managing their assets such as acquire more assets by entering into a conditional agreement with other company which will bring more benefit to both of them.
If we are the investors, we will invest in KLK. This is because KLK has a stronger policy in debt financing by referring to their debt financing and coverage ratios. Besides that, KLK is more efficient in generate earning as its earnings per common share and dividend payout ratios are higher than IOI. This shows that KLK has a better performance in market which will give more confidence to the investor.
References
http://www.klk.com.my
http://companydatabase.org
http://www.ioigroup.com
http://www.linkedin.com
http://www.rspo.org
Attachments: Annual Reports for both companies
Appendix 1
