Investment Highlights

• Maintain BUY on IOI Corporation with an unchanged fair value of RM5.05/share. Our fair value is based on an FY20F PE of 27x.

• IOI is currently trading at a FYE6/20F PE of 24.3x compared with Kuala Lumpur Kepong’s (KLK) FYE9/19F PE of 24.4x and Sime Darby Plantation’s FYE6/20F PE of 26.4x.

• We have reduced IOI’s gross DPS from 16.5 sen to 8.5 sen for FY19F. IOI’s gross DPS is expected to normalise in FY19F. In FY18, IOI paid a special dividend of 11.5 sen using proceeds from the disposal of Loders Croklaan.

• We forecast oleochemical EBIT to grow by 13.4% in FY19F. We have assumed an EBIT margin of 5.0% for FY19F vs. 4.5% in FY18. We believe that IOI’s oleochemical division would continue to perform well in FY19F underpinned by a stable cost of feedstock.

• Risk is if there is swift recovery in palm products. The price volatility may erode oleochemical EBIT margin as companies including IOI would not be able to increase the selling price of oleochemical products fast enough. Palm products such as stearin and palm kernel oil are used to produce oleochemicals.

• IOI plans to build a fatty acid plant of 110,000 tonnes per year in Penang. The plant is estimated to cost between RM180mil and RM200mil.

• We forecast plantation EBIT to decline by 7.2% in FY19F due to rising costs. Production cost (cash cost) is expected to increase from RM1,400/tonne in FY18 to a range of RM1,450/tonne to RM1,500/tonne in FY19F as the cost of wages and fertiliser has risen. Fertiliser costs are envisaged to increase by 5% in FY19F.

• We have assumed an FFB production growth of 5.7% for IOI in FY19F vs. 11.4% in FY18. We understand that IOI’s FFB output in Malaysia has not been exciting in the past couple of months due to the dry weather. This is similar to the cropping patterns of other plantation companies in Malaysia. Going forward, FFB production is expected to rise as rainfall has improved in Sabah.

• IOI is on the lookout for investments. The group has 24 months to use RM946.2mil of the disposal proceeds from Loders Croklaan for investments. If IOI does not invest its proceeds, it has to secure approval from shareholders in an EGM to revise the utilisation of the disposal proceeds.

Source: AmInvest Research - 17 Oct 2018