Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.20/share. Our fair value of RM4.20/share is based on an FY21F PE of 27x.

• IOI is currently trading at FYE6/20F PE of 30.6x vs. KL Kepong’s FYE9/20F PE of 26.5x and Sime Darby Plantation’s FYE12/20F PE of 38.1x. We have reduced IOI’s FY20F net profit by 11.4% to account for a weaker plantation EBIT margin resulting from higher production costs.

• We understand that the weather at IOI’s oil palm estates in Kalimantan had been dry in the past two months. Also, there are no hotspots or fires at IOI’s estates in Indonesia. On the other hand, rainfall at IOI’s oil palm estates in Sabah is still decent.

• We believe that the oleochemical unit would continue to sustain its earnings in FY20F. However, there is risk that refining margins may ease. Hence, we forecast IOI’s manufacturing EBIT (refining and oleochemical) to inch down by 2.5% in FY20F. We have assumed a manufacturing EBIT margin of 6.3% in FY20F vs. 6.6% in FY19. About 30% to 40% of IOI’s manufacturing EBIT came from the refining segment in FY19.

• IOI’s oleochemical earnings are expected to be underpinned by low feedstock costs. Also, as more than half of IOI’s oleochemical products are sold to high valueadded industries such as pharmaceuticals, their selling prices are not as volatile as those in the basic fatty acid segment.

• As for the upstream division, we expect IOI’s FFB production to be flat in FY20F compared with a 3.3% decline in FY19. IOI’s FFB output growth is not expected to be exciting as the size of mature areas is envisaged to fall. This is due to replanting of about 10,000ha to 11,000ha in Malaysia. IOI’s FFB production grew by 17.8% YoY in 2MFY20.

• IOI is still on the look-out for acquisitive opportunities. We believe that the group has until March 2020 to make acquisitions using the RM959.9mil proceeds from the disposal of Loders Croklaan.

• If there are none, IOI would decide whether to extend the timeline for investments or return the cash to shareholders in the form of dividends. The cash of RM959.9mil would translate into a gross DPS of 15 sen. Currently, we forecast a gross DPS of 8.0 sen for IOI in FY20F, which translates into a yield of 1.9%.

Source: AmInvest Research - 10 Oct 2019