IOI Group Berhad referred as Industrial Oxygen Incorporation Sdn Bhd. IOI Group Berhad is one of Malaysia largest company and also is an industrial gas manufacturing since year 1969. IOI Group Berhad was associated with real estate to property development in 1982 followed by Oil Palm plantations in 1985.
Nowadays the core business of IOI Group is oil palm plantation and also a major player in the property and leisure industries. At year 2009, about 65% profit income come from oil palm plantation. IOI Group is become internationally known as a leading global integrated palm oil player. This is because the IOI with the oil yield about 6 tonnes per hectare per year at its matured estates. The core business of IOI is located in Malaysia. The group also has manufacturing facilities in other countries.
Nowadays IOI is already across major continents and serving global markets in more than 65 countries. IOI Group now has employees more than 30000 personnel of more than 23 different nationalities in 15 countries. IOI has established its leadership position in the various businesses and the most efficient and profitable is in Malaysia plantation and property companies.
Beside that the IOI Group is also largest vegetable oil oleo chemical manufacture in Asia. The vision of IOI Group Berhad is to be a leading corporation in our core business by providing products and services of superior and by sustaining consistent long term growth in volume and profitability.
IOI's upstream plantation is where it all begins and this segment entails their oil palm estates and oil mills located in the world's largest oil palm growing region in Malaysia and Indonesia (IOI Group, 2013).
Part B: Porter five competitive forces
The porter five forces can help us to determine the industry profitability.
Threat of new entrant
The threat of new entrant is very low. This is because the barriers entries are considerably high. They also need a huge capital to invest in order to be competitive. Since IOI Group has already established leadership position, therefore the new entrants need to produce the product is high quality to established their market value. Beside that the gaining authorization from local government need to take considerable amount of time and resources to establish the new oil plantation or companies.
Threat of substitute product or services
The threat of substitute product or services is very low. Nowadays IOI Group oil palm plantation and property companies are consistently ranked among leading companies in Malaysia. So is hard to find other company product or service to replace.
Bargaining power of suppliers
The bargaining power of suppliers is low. This is because the IOI Group is feedstock and raw material supply from their IOI plantation or from well-known business partners. IOI also is a largest supplier of certified sustainable palm oil in Asia, Europe and the America and enable offer all their palm based fractions as Roundtable on Sustainable Palm Oil (RSPO) Mass Balance across all regions.
Bargaining power of buyers
The bargaining power of buyers is low. This is because IOI delivering superior value in their products and services to their customers. IOI also achieve through a culture of innovation, quality, consistency and matching customer expectation in their products and services. The product of IOI is also count fairly normal. So the customer is not easily switch to another product.
Competitive rivalry
The IOI competitive rivalry is low. This is because IOI Group is a multi-national company with business in oil palm plantations, manufacturing of oleo chemicals and specialty fats and property development. In the international front, the main competitor is from Singapore listed Wilmar international Ltd and Indonesia PT Sinar Mas Agro Resources Tbk. In Malaysia just have four competitor which are Felda Group, Slime Darby Berhad, Kuala Lumpur Kepong Berhad and United Plantations Berhad.
Part C: Assessment on the Management of the Company
IOI achieves the growth in the Group's plantation business over the years not just through acquisitions, but also because of distinctive plantation management practices that emphasize greatly on continuous improvement in yields and in cost efficiencies which enable the Group to be one of the most cost effective producers in the industry. IOI's production team will make sure that quality in the plantation trade begins with the use of better-quality planting materials to ensure high oil yield and quality of the palm oil produced.
IOI Group is one of largest oil manufacture Malaysia. IOI also has established its leadership position in the various businesses. Beside that IOI Group has achieve many award and recognition. Such as Anugerah Industri Sawit for Best-in-Class Palm-Based Oleochemical Company - IOI Oleochemical Industries Bhd, 2nd SEA's Institutional Investor Corporate Awards - Malaysia's Top Ten Companies - IOI Group and others. In early year 1969, IOI was gas industrial and the principal business is distribution industrial gas. This is benefit to our country environment.
IOI Group has provided oxygen to the environment. This make that Malaysians can live in the environment fresh and health. Beside that IOI group has 3 main business core like property, plantation and oleo-chemical. These show that the IOI group has many ways to gain revenue from the business. IOI Group is a core of highly energized, motivated and dedicated people who continuously strive for excellence in achieving the goals and aspirations of the Group. These are the highly valued, dedicated and committed work teams that make a real difference to the competitive edge of the Group, assisting the Group to often outperform many of its competitors in the various business sectors that it is involved.
IOI Group is a potential company in the future and also established efficient and profitable in Malaysia. So that IOI Group is a good choice for the investor to invest.
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Part D: Ratio Calculations
Year
Accounting Ratios
Year 2009
(RM'000)
Year 2010
(RM'000)
Year 2011
(RM'000)
Part E: Ratio Analysis
(i) Return on assets
2009
2010
2011
Return on assets
5.92%
12.22%
12.02%
Return on assets (ROA) it measures the return on net income on total assets, an indication on how efficient a firm is at using its assets to generate earnings. It means ROA indicates the how much cents that company can earn on each RM 1 of assets. Thus, higher values of ROA is considered better because show that business is more profitable. In year 2009-2011, for every RM 1 in total asset, IOI Corporation generated RM 0.0592, RM 0.1222 and RM 0.1202 in profit, respectively.
An increasing trend of ROA indicates that the net income of the firm is improving and decreasing trend of ROA means that net income of the firm is falling. So, ROA is sharp increased from 5.92% to 12.22% between 2009 and 2010 because net income of firm has greater improvement (increase from RM 983,517,000 to RM 2,035,661,000). Although net income of firm keep improving in 2011 but due to inefficient of manage asset, ROA of firm in 2011 only have 12.02%. If IOI Corporations change to use more expensive plant and equipment to generate income, their ROA will naturally be lower than before which are low value asset.
(ii) Net profit margin
2009
2010
2011
Net profit margin
6.74%
16.23%
13.76%
Net profit margin is the ratio to measures the return on net income on total sales, an indication on how efficient a firm to control its overall costs. Higher value of net profit margin ratio is considered better because more proportion of revenue is converted to net income. Net profit margin ratio of 1% means that a net profit of RM 0.01 is made on each ringgit of sales. In year 2009-2011, for every RM 1 in net income, IOI Corporation generated RM 0.0672, RM 0.1623 and RM 0.1376 in profit, respectively.
An increase in net profit margin ratio means that the net income is improving. It is also important to compare the gross margin ratio of a business to the average gross profit margin of the industry. Besides, a business which is more efficient and better controlling of its overall costs will have higher net profit ratio. Due to greater improvement of net income, net profit margin of firm is increase from 6.74% to 16.23% between 2009 and 2010. However, the greater operating cost of firm in 2011 cause net profit margin ratio decrease to 13.76%.
(iii) Current ratio
2009
2010
2011
Current ratio
470.37%
499.79%
336.67%
Current ratio is the ratio to measure current assets of a business to its current liabilities, an indication of the extent to which the company can cover the short term debt of its creditors by assets (cash, accounts receivable, inventory, etc.) that are expected to be liquidated quickly. Current ratio can tell us whether the current assets of company are enough to cover current liabilities or not. If current ratio below than 1 shows critical liquidity problems because it means that total current liabilities of firm more than total current assets. In year 2009-2011, IOI Corporation has 4.7037%, 4.9979%, and 3.3667% in current asset for every 1% in current liabilities, respectively. So, IOI company position is good and the liquid asset is high enough to meet with short term obligation.
Due to IOI significant increase the amount of cash and bank balances, current ratio of firm in 2009 to 2010 is increase from 470.37% (4.7037) to 499.79% (4.9979). However, higher short term borrowing and trade payables that make by IOI Corporations in 2011, cause current ratio sharp decreasing until 336.67% (3.3667). In general rule, higher current ratio is consider better but if more than 250% (2.5) might indicate existence of idle or underutilized resources in the firm. So, the current ratio indicates that the company is inefficient to manage their asset.
(iv) Total assets turnover
2009
2010
2011
Total assets turnover
91.36%
72.32%
82.19%
Total assets turnover is the ratio to measure the effectiveness of the use of all the firm's assets, an indication on efficiency of the company using its assets to generate revenue. If a firm can generate more sales with fewer assets it has a higher turnover ratio which tells it is a good firm because it is using its assets efficiently. In year 2009-2011, total revenue of IOI Corporations is 91.36%, 72.32% and 82.19% of total asset, respectively.
From 2009-2011, total assets turnover of firm have a sharp fluctuations. Due to greater declined of total revenue and greater increased of total asset, total assets turnover of firm between 2009 and 2010 decrease 18.04 % point. Lower turnover ratios indicate that the company is not using its assets optimally. They may also indicate that the assets are obsolete and companies with low asset turnover ratios are likely to be operating below their actual full capacity. However, from year 2010-2011, total assets turnover immediately increase 9.87% point compared to last year. It means improvement of the more sales the company is generating from its assets.
(v) Debt ratio
2009
2010
2011
Debt ratio
45.11%
36.17%
37.62%
Debt ratio is using to measures the percentage of total liabilities of a business to its total assets, an indication on total assets of a business to cover a firm's liabilities. Lower value of debt ratio is considered better because indicates that lower portion of firm's assets are claimed by creditors. Higher value means higher risk in operation since the business would find it difficult to obtain loans for new projects. In year 2009-2011, total liabilities of IOI Corporations are 45.11%, 36.17% and 37.62% of total asset, respectively.
Due to greater enhancement of total asset, debt ratio of firm between 2009 and 2010 is reduced from 45.11% to 36.17%. A low debt ratio in year 2010 indicates the risk associated with the firm's operation is lower and conservative financing with an opportunity to borrow in the future also no have significant risk. However, lower debt ratio may shows that the IOI Corporations has problems of getting paid on its receivable and have long inventory turnover.
(vi) Basic earnings per share
2009
2010
2011
Basic earnings/share
RM0.1662/share
RM0.3296/share
RM0.3475/share
Basic earnings per share ratio is using to measure the amount of earnings of firm per each outstanding share of a company's stock, an indication of a company's profitability. A higher EPS is considered better because it means company is earning more profit per outstanding share they own. In year 2009-2011, earnings per share of IOI Corporations are RM0.1662/share, RM0.3296/share and RM0.3475/share, respectively. Continuous improvement of net income is important factor of earnings per share ratio from year 2009-2011 to show the increasing trend.
(vii) Price per earnings ratio
2009
2010
2011
Price/earnings
28.40
15.20
15.25
Price-earnings ratio is measure market value of company share price to its earnings per share, an indication on of how much investor is willing to pay for a ringgit of a firm's earnings. It can show the share price of a company is fairly valued, undervalued or overvalued. If the justified price/earnings ratio in future is higher than the current price/earnings ratio, the share is undervalued and should be purchase. Conversely, if the justified price/earnings ratio in future is lower than price/earnings ratio, the share is overvalued and should be sale. In year 2009-2011, investor is willing to pay RM 28.40, RM 15.20 and RM 15.25 for every RM 1 of earning per shares that company produced, respectively.
From 2009 to 2010, price that investor willing to pay for RM 1 is sharp decreased RM 13.20. Even though IOI Corporations has greater improvement of earning per shares, percentage increases of market value per share is lower. In fact, higher price to earnings ratio indicates that the investor has high expectations for the future of the company share and therefore it has bid up the price of market. So, sharp decreased of price to earnings ratio from 2009 to 2010 indicates the investor does not have much confidence in the future of the company share. In 2011, price to earnings ratio have little improvement.
(viii) Return on equity
2009
2010
2011
Return on equity
11.75%
21.29%
19.52%
Return on equity (ROE) is ratio to measures a firm's net income of a business during a year to its stockholders' equity during that year, an indication on how efficient a firm is at using its equity to generate earnings. In general rule, a higher value of return on equity is considered better because meaning that the company is efficient in generating income on new investment. However, it is not a fair to conclude that the firm with a higher ROE is better investment because sometimes firm require large infrastructure build before generating any revenue.
In year 2009-2011, for every RM 1 in total equity, IOI Corporation generated RM 0.1175, RM 0.2129 and RM 0.1952 in profit, respectively. Improvement of ROE between years 2009-2010 indicate efficiency at generating profits from every unit of shareholders' equity is enhance. This improvement is thanks to company performance. A high return on equity indicates that the company is efficient of management to utilizing its equity and spending wisely. However, from year 2010 and 2011, return on equity ratio is decreased 1.77% point.
Part F: Cash Flow Statement Analysis
Cash and cash equivalent is increased by 28.16% from year 2010 (RM 3,877,306,000) to year 2011 (RM 3,877,306,000). On other hand, Cash and cash equivalent in year 2009(RM 2,459,382,000) to year 2010(RM 3,877,306,000) is increase by 57.65%. In short, within this three years (2009-2011) in year 2010 attain highest cash and cash equivalent. IOI faces net decrease in cash and cash equivalents in year 2011(RM 1,112,942,000) and 2009 (RM 414,574,000). Only in year 2010 IOI obtain net increase in cash and cash equivalents which were RM 1,448,360,000.
In year 2011, the net decrease of cash and cash equivalent is caused by cash used in investing activities (RM1,282,833,000) and financing activities( RM739,815,000) cannot cover net increase cash in operating activities (RM 909,706,000). In year 2010, IOI can get increase of cash and cash equivalent due to net increase cash from operating activities (RM 2,008,552,000) and lowest net cash used in investing (RM 483,558,000) and financing activities (RM 76,634,000). Although IOI get highest net cash inflow from operating activities (RM 2,827,124,000) in years 2009, however cannot cover net cash outflow from financing (RM2.517,096,000) and investing (RM724,602,000) activities.
Operating profit before working capital changes in year 2011 is higher than in year 2010 but IOI had higher cash outflow in working capital in year 2010. Thus, cash generated from operations in 2010 is higher than 2011. In year 2009, IOI attains highest net cash from operating activities within these 3 years due to lowest working capital cash outflow.
From year 2009 to year 2010, net cash outflow in investing activities decrease by 33.37%. Then from year 2010 to year 2011, cash used in investing activities increase by 165.30%. In year 2011, IOI used highest cash to finance noncurrent capital (long term) asset. IOI has highest spending on capital projects in year 2011. This is because of IOI increases property, plant and equipment.
In financing activities, from year 2009 to year 2010, net cash outflow is 96.96%. In addition, net cash used in financing activities increased by 865.38% from year 2010 to year 2011. Principal payments on debt, share repurchases and cash dividend payments in year 2010 is lowest one when compare with others 2 years. In year 2011, IOI net cash used in financing activities is highest within these 2 years.
Cash and cash equivalent is decreased 176.84% from year 2010 to 2011. On other hand cash and cash equivalent is increased by 449.36% from year 2009 to year 2010. Due to drastically changes in cash and cash equivalent changes (Increase/Decrease), it will cause cash and cash equivalents at end of financial year have significant changes.
Cash flow for every activity in each year is significantly different. For example, IOI used net cash of RM 2,517,096,000 in financing activities in year 2009 but in next year just used next cash of RM 76,634,000 in finance activities. Most frequently of investing activities will be a negative figure dominated by expenditure on capital projects or long term asset but, that is not always the case because of depending on the nature of the business.
Part G: Analysis on the Common Size Income Statement
According to the result of the common size income statement, the revenue of the IOI Group berhad was drop to the 85.91% in 2010 but it increased to 110.64%. The reason is the demand of palm oil and related product increased dramatically, it occupy a big percentage of sales. Eventually, the cost of sales dropped by 84.26% in 2010, it is raised to 115.01%due to the higher sales. Therefore, the gross profit was dropped by 96.88% because of the higher cost of sales incurred. From the analysis, we know that the other operating income was increased dramatically by 581.72%. This is because IOI Group gained in the financial derivative instrument which is high risk high return on the underlying asset and gain on disposals. Besides that, marketing, selling expenses was reduced by 90.80% in year 2010 to 85.49% in year 2011 because of the well- management on administration department. However, the cost of administrative was decreased by 99.20% in year 2010 and increased by 113.18% in year 2011.
In addition, the other operating expenses had dramatically increased by 131.49% in year 2011 due to loss on the financial derivative instruments. Eventually, there are increased in expenses since there is huge profit in invest in financial derivatives, so it could cover the loss, resulting in increased in operating profit which increased by 133.89% in year 2010 and raised to 142.99% in year 2011.
Moreover, in year 2011, IOI Group had reduced in jointly controlled entities, thus the interest income would reduce by 78% approximately. The reason that finances cost decreased because it did not borrow any loans in term of short term and term loans which reduced from 95.81% in 2010 to 73.60% in year 2011. On the other hands, the share of associates was increased dramatically 553.28% in year 2010 and double up to 1207.90% in year 2011.
Totally, the profit before tax was increased as well which increased by 164.54% in 2010 and up to 20% in year 2011 which is 184.74%. Since there is increased in profit, it made the tax raised as well which is 99.71% in 2010 to 117.69% in 2011. Finally, the profit for the year ended would rise up, even though the tax increased but there is so much of earning in sales, financial derivatives, gain on disposal and so on.
IOI Group Berhad
Common Size Income Statement
Year
2009 ( base year)
RM'000
Percentage of base year
2010
RM'000
Percentage changes from 2009 to 2010
2011
RM'000
Percentage change 2011 compare to 2009
Revenue
14,600,474
100%
12,542,962
= 85.91%
16,154,251
=110.64%
Cost of sales
(11,080,246)
100%
(9,335,726)
=84.26%
(12,743,689)
= 115.01%
Gross profit
3,520,228
100%
3,207,236
= 91.11%
3,410,562
=96.88%
Other operating income
279,909
100%
565,448
=202.01%
1,628,282
=581.72%
Marketing and selling expenses
(277,668)
100%
(252,129)
=90.80%
(237,367)
=85.49%
Administration expenses
(310,217)
100%
(307,736)
=99.20%
(351,110)
=113.18%
Other operating expenses
(1,243,197)
100%
(576,476)
=46.37%
(1,634,722)
=131.49%
Operating profit
1,969,055
100%
2,636,343
= 133.89%
2,815,645
= 142.99%
Interest income
60,346
100%
47,214
= 78.24%
47,146
=78.13%
Finance costs
(230,853)
100%
(221,170)
= 95.81%
(169,915)
=73.60%
Share of results of associates
9,913
100%
54,847
=553.28%
119,739
=1207.90%
Share of results of jointly controlled entitles
(258,344)
100%
33,399
=112.92%
50,997
=119.74%
Profit before taxation
1,550,117
100%
2,550,633
=164.54%
2,863,612
=184.74%
taxation
(486,943)
100%
(485,517)
=99.71%
(573,099)
=117.69%
Profit for the financial year
1,063,174
100%
2,065,116
=194.24%
2,290,513
=215.44%
Part H: Summary and Recommendation
We will conclude that financial position and performance based on five criteria which are the following:
Capital - This refers to the financial resources available for use, such as cash, machine, buildings, factories, and so on. The higher the capital that a company holds the higher ability to absorb potential loss. Based on the total asset turnover's result show that there is increased in the turnover due to the company using their assets to generate revenue. Therefore, IOI Group can absorb the loss when their capital is higher.
Profitability - Since the assets of the IOI Group mainly are refined palm oil and related product which is a higher risk asset, simultaneously, it can bring in higher return as well. From the return on asset and return on equity, we know that there is increased in both compared to 2009. So, it indicates that IOI Group can generate higher profit.
Liquidity - it is used to determine a company's ability to pay off their short-term obligation. In general, the higher the liquidity, the higher ability of the company can cover the short-term debts. From the current ratio, we can clearly see that the liquidity of IOI Group is quite higher which is 4.99% in year 2010 and 3.66% in year 2011.
Management - which is an administrative skill of the company. The higher administrative skill of the management, the lower cost and the higher efficiency that a company can generate. The management of IOI Group had well managed in the business which diversified their business in order to reduce the risk of loss and generate higher profit. Besides that, IOI Group had achieved a recognition that is Anugerah Industri Sawit for Best-in-Class Palm-Based Oleochemical Company.
Competition between industry - from the industry analysis that clearly show that IOI Group has better advantage of competition among industries which are the IOI Group has larger capital to establish their businesses, the threat of substitute goods are low due to lower competitors engaging in this field, bargaining power of supplier , bargaining power of buyers and competitive rivalry are low.
Since the assets of the IOI Group are risky asset, so this is depend on the objective of the investors. If the investors are risk- taker, so they should invest in this company. But if the investors are hedger or non-risk taker, they should make an analysis before they invest in the company.
