Investment Highlights

• We are keeping our HOLD recommendation on IOI Corporation with an unchanged fair value of RM4.40/share. Our fair value for IOI is based on an FY20F PE of 27x.

• We do not expect a significant change in IOI’s business strategy following the demise of its founder, Tan Sri Lee Shin Cheng. On 18 June 2019, Datuk Lee Yeow Chor was redesignated as group managing director from chief executive officer previously.

• We are keeping our average CPO price assumption of RM2,100/tonne for IOI for FY19E (FY18: RM2,549/tonne). For FY20F, we have assumed an average CPO price of RM2,200/tonne.

• Like other plantation companies, IOI is expected to be affected by weak palm product prices. Unlike its peers however, IOI is forecast to be cushioned by a strong manufacturing division (mainly refining and oleochemical activities).

• Manufacturing is expected to overtake plantation as the largest earnings driver for IOI in FY19E. Manufacturing (excluding fair value changes and associates) accounted for 51.1% of IOI’s operating profit in 9MFY19.

• We believe that IOI’s manufacturing division would continue to perform well in 4QFY19 on the back of sales of high value-added oleochemical products such as those used in the pharmaceutical industry. Refining margins are also expected to remain positive in 4QFY19.

• We reckon that IOI has already locked in the selling prices for the oleochemical segment in FY19E. Hence even though the cost of raw materials has declined, EBIT margin would still be intact in FY19E. Overall, we have assumed an EBIT margin of 6.3% for the manufacturing division in FY19E compared with 4.5% in FY18.

• We think that high value-added products account for about 60% to 70% of oleochemical revenue while the balance 30% to 40% are sales of basic fatty acid products. IOI’s oleochemical products are sold mainly to Japan and the European Union.

• There is potential for higher dividend payments in FY20F if IOI does not find investment opportunities. IOI has not used any of the RM959.9mil cash allocated for investments after the disposal of 70% of Loders Croklaan in FY18.

• Assuming all of the RM959.9mil are distributed as dividends, this would translate into additional dividends of 15 sen per share. Currently, we forecast a gross DPS of 9 sen for FY20F, which implies a yield of 2.1%.

Source: AmInvest Research - 2 Jul 2019