Investment Highlights

• We are upgrading IOI Corporation from HOLD to BUY with a higher fair value of RM5.05/share. Our fair value for IOI is based on a PE of 27x on FY20F EPS. The PE of 27x is consistent with the PE that we have applied to arrive at the fair values for Genting Plantations and Kuala Lumpur Kepong.

• We have reduced IOI’s FY19F gross DPS from 20.5 to 16.5 sen. In spite of the lower gross DPS, the dividend yield is still decent, at more than 3%. Based on the gross DPS of 16.5 sen, the dividend payment of RM1.0bil for FY19F would only be 37.5% of IOI’s gross cash reserves of RM2.7bil as at end-June 2018.

• We believe that it would take time for IOI to acquire plantation assets. According to an announcement to Bursa Malaysia, IOI has 24 months to use its cash proceeds from the disposal of Loders Croklaan for investments. As at 10 August 2018, IOI has used 71.2% of the RM3.8bil disposal proceeds for repayment of borrowings and dividends.

• Operationally, we have assumed that IOI’s FFB production would grow by 5.7% in FY19F (FY18: 11.4%) on the back of an increase in mature areas of 7,000ha in Indonesia. We estimate that Indonesia accounts for less than 5% of IOI’s group FFB production currently.

• We believe that IOI would be focusing on replanting of ageing oil palm trees in Malaysia instead of new plantings of oil palm in Indonesia in FY19F. Although IOI has received approval from the RSPO to carry out new plantings of 8,000ha in Indonesia, we think that IOI may defer its plans. Since IOI was temporarily suspended for four months by the RSPO in 2016, the group has been cautious with its planting activities in Indonesia.

• IOI may replant about 7,000ha of ageing oil palm trees in Sabah in FY19F. IOI has already completed its replanting activities in Peninsular Malaysia. Replanting cost until maturity is estimated to be RM15,000/ha to RM20,000/ha.

Source: AmInvest Research - 7 Sept 2018