Investment Highlights

• We are keeping our HOLD recommendation on IOI Corporation with an unchanged fair value of RM4.30/share. Our fair value for IOI is based on an FY21F PE of 27x.

• In spite of the decline in new plantings in FY21F, we do not think that IOI’s capex would fall in the long term. This is because the group may be stepping up replanting of ageing oil palm trees and expanding its oleochemical capacity in Penang.

• After the completion of new plantings of 3,600ha in Indonesia in FY20F, IOI would not have any plantable land left. We believe that landbank acquisition has been slow as prices are high. As at end-June 2019, IOI had planted land of 176,156ha in Indonesia and Malaysia.

• IOI is planning to replant about 11,000ha of ageing oil palm trees in FY20F vs. 8,000ha in FY19. Also, the group is planning to construct a RM220mil oleochemical plant in Penang. The oleochemical plant is expected to increase IOI’s production capacity by 110,000 tonnes per year to 890,000 tonnes per year upon completion.

• We have assumed a capex of RM500mil for IOI in FY20F compared with RM395.7mil in FY19. Free cash flows are estimated to be 10.3 sen per share in FY20F and 14.1 sen per share in FY21F vs. 13.0 sen per share in FY19.

• Although IOI’s capex is not expected to fall, we believe that there is potential for higher dividends. IOI has not used any of the RM959.9mil proceeds from the disposal of Loders Croklaan for acquisitions. The proceeds of RM959.9mil translate into 15 sen per share. We believe that IOI will decide on the utilisation of the proceeds in March 2020.

• Operationally, we have assumed that IOI’s FFB production would be flat in FY20F. The group’s FFB output declined by 5.7% YoY in 1HFY20.

• We do not envisage a growth in IOI’s FFB output in FY20F. IOI was affected by the haze in Malaysia in 3Q2019 and a decline in mature areas resulting from replanting of ageing oil palm trees.

• We forecast manufacturing EBIT to ease by 7% in FY20F as high feedstock costs may erode operating profit margin. We have assumed a manufacturing EBIT margin of 6.0% in FY20F vs. 6.6% in FY19.

Source: AmInvest Research - 29 Jan 2020