Investment Highlights

• Maintain HOLD on IOI Corporation (IOI) with an unchanged fair value of RM4.60/share. Our fair value for IOI is based on a FY20F PE of 27x.

• We forecast IOI’s core net profit to improve by a small 2.4% in FY19F as weaker plantation earnings are partly offset by stronger downstream profits. IOI’s plantation EBIT is expected to decline in FY19F due to a lower CPO price and slower FFB production growth. We believe that production costs would also rise in FY19F as costs of fertiliser and wages are going up.

• On the bright side, we reckon that IOI’s manufacturing division (refining and oleochemical activities) would be able to sustain its profitability on the back of low raw material costs and positive demand. We forecast manufacturing EBIT to improve by 13% in FY19F as EBIT margin rises from 4.5% in FY18 to 5.0% in FY19F.

• Unlike other downstream companies, IOI’s oleochemical unit is more resilient as some of its products are sold to pharmaceutical companies. This is more stable and the margins are higher compared with oleochemical products sold to household industries such as shampoo or soap.

• IOI is on the lookout for investments. The group is supposed to utilise about RM959.9mil for investments by March 2020. If nothing materialises, IOI has the option of requesting approval from shareholders to pay dividends. Based on the cash of RM959.9mil, the dividend payments would translate into a gross DPS of 15 sen.

• Operationally, we have assumed that IOI’s FFB production would improve by 3.4% in FY19F (1HFY19: -10.1%) compared with 11.4% in FY18. IOI’s FFB output was poor in 1HFY19 due to a change in cropping patterns in Sabah. IOI’s FFB production in Sabah is expected to reach its peak either in January or February 2019.

• Sabah accounts for almost 70% of group FFB production while Peninsular Malaysia accounts for another 26%. Indonesia makes up the balance 4% of IOI’s FFB production.

• IOI is expected to replant about 7,500ha to 9,000ha of ageing oil palm trees in FY19F. These would be roughly 5% to 6.0% of IOI’s mature areas. Most of the replanting is expected to take place in Sabah.

• New plantings of oil palm in Kalimantan are envisaged to amount to 7,000ha in the coming two years. IOI had already planted about 500ha in 1QFY19.

Source: AmInvest Research - 17 Jan 2019