Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.30/share. Our fair value for IOI is based on a FY21F PE of 21x. We are keeping IOI’s FY21F net profit.

• IOI announced that it has extended the timeframe to use the RM938.2mil proceeds allocated for investments by another 18 months. Recall that IOI received proceeds of RM3.8bil from the disposal of Loders Croklaan in 2018. This implies that the new deadline for IOI to invest in assets is September 2021. There is no opportunity for shareholders to receive additional dividends as of now.

• IOI’s core net profit (ex-net forex gain of RM29.9mil) of RM332.6mil in 1HFY20 was 17% below consensus estimates and our forecast. We have trimmed IOI’s FY20F net profit by 5.9% to account for a weaker-than-expected manufacturing EBIT margin.

• IOI’s core net profit fell by 37.7% QoQ to RM127.7mil in 2QFY20. Although plantation EBIT (includes associates and fair value changes) climbed by 38.5% to RM175.3mil, manufacturing EBIT (includes associates and fair value changes) plunged by 78.1% to RM29.9mil in 2QFY20 from RM136.5mil in 1QFY20.

• Manufacturing division was affected by unrealised fair value loss of RM93mil (1QFY20: Unrealised fair value loss was RM3.5mil) on derivative financial instruments and weaker oleochemical and refining earnings in 2QFY20. We believe that the downstream division was hit by higher cost of feedstock.

• Oleochemical is estimated to account for 60% of manufacturing EBIT while refining is envisaged to make up the balance 40%. Manufacturing EBIT margin declined to 1.6% in 2QFY20 from 8.0% in 1QFY20.

• Comparing 1HFY20 against 1HFY19, IOI’s manufacturing EBIT dived by 38.0% while plantation EBIT rose by 13.2%. Average CPO price inched up by 2.3% to RM2,128/tonne in 1HFY20 from RM2,081/tonne in 1HFY19. FFB production slid by 5.7% YoY in 1HFY20.

• Going forward, IOI expects CPO prices to be volatile due to the impact of the coronavirus (Covid-19) outbreak. On a positive note, demand for CPO is expected to pick up due to the Ramadan season in April and May 2020.

• As for the manufacturing division, the operating environment is expected to be challenging. Apart from the Covid-19 outbreak, the higher palm prices have affected the demand and margins for palm-based downstream products.

Source: AmInvest Research - 19 Feb 2020