Friday, October 24, 2008

WHY Share Prices of IOI Corporation Berhad Tumble ?


IOI Corporation Berhad (“The Company”) wishes to make the following clarifications in connection with certain news reports quoting rumours that the Company had suffered foreign exchange trading losses.

The Company, being involved in substantial downstream businesses selling palm oil and related value-added products to many other countries, derives a substantial part of its revenue in several foreign currencies. For example, in FY 2007/2008, about USD3 billion of its annual revenue are denominated in foreign currencies, mainly Euro and US Dollars.

At the same time, the nature of the Company’s downstream businesses is such that a lot of our sales to established customers are for the forward months, sometimes up to two years forward. These sales are secured against forward raw material purchases which are often denominated in different currencies, mainly Malaysian Ringgit and US Dollars.

As a result, the Company and its subsidiaries have been utilizing various methods of forward currency coverage and hedging to match the respective income streams and raw material purchase costs.

The nature and details of these foreign currency coverage contracts, particularly the currency swaps and options, have been adequately disclosed according to the accounting rules in the Company’s quarterly results announcements and annual reports during the last several financial years.

We wish to state that making losses or gains on these forward currency contracts is a normal course of events for the Company’s downstream businesses. Due to the disclosure requirements, the losses or gains on some of these forward contracts, even though unrealised, will have to be disclosed first whereas the corresponding forex gains or losses on the sale of physical products can be taken up only at the time of actual sale.

The losses or gains from these “timing differences” have always been occurring in the past but have been made more significant recently due to the volatile foreign exchange markets. What is more important to note at the end of the day is that the Company’s downstream businesses derive their profits from the ‘locked-in’ contribution margins and not from the fluctuations in exchange rates.

Finally, the Company wishes to emphasise that it is not our policy to take speculative positions on foreign currency movements. Our forward foreign currency coverage and hedging contracts are intended to protect ourselves from the fluctuating foreign currency movements and ensure that the intrinsic value-add margins in our downstream businesses are intact. The Company has always practised prudent operational and financial management which have been a hallmark of our success for so many years.

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