Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM3.17/share. Our fair value for IOI is based on an FY21F PE of 20x.

• IOI’s 9MFY20 core net profit of RM569.1mil (ex-net forex loss of RM206.5mil) was below our forecast and consensus estimates.

• We have reduced IOI’s FY20F net profit by 4.8% to account for weaker manufacturing EBIT margin and lower FFB production growth of -9% vs. zero previously.

• IOI’s EBITDA fell by 6.7% YoY to RM975.0mil in 9MFY20 dragged mainly by a 29.0% decline in manufacturing EBIT (refining and oleochemicals).

• Manufacturing EBIT margin (ex-associates and fair value changes) shrank to 4.3% in 9MFY20 from 6.2% in 9MFY19 due to a higher cost of feedstock and lower sales volume of oleochemical products. We believe that global demand for basic oleochemical products is soft currently due to the Covid-19 pandemic.

• Although plantation EBIT (ex-associates and fair value changes) climbed by 23.2% YoY to RM397.3mil in 9MFY20, this was not enough to offset the slide in manufacturing profits. The YoY rise in plantation EBIT in 9MFY20 was underpinned mainly by higher CPO prices.

• Average CPO price rose by 12.5% to RM2,294/tonne in 9MFY20 from RM2,039/tonne in 9MFY19. FFB production growth was -14% YoY in 9MFY20.

• Comparing 3QFY20 against 2QFY20, IOI’s plantation division EBIT (ex-associates and fair value changes) slid by 12.5% QoQ to RM136.7mil in 3QFY20 due to lower FFB production. IOI’s FFB production dropped by 20.8% QoQ in 3QFY20. Average CPO price was RM2,704/tonne in 3QFY20 vs. RM2,246/tonne in 2QFY20.

• Manufacturing EBIT (ex-associates and fair value changes) declined by 34.1% QoQ to RM52.2mil in 3QFY20 due to lower refining and oleochemical margins. Also, IOI recognised a share of loss of RM19.8mil in Bunge Loders Croklaan in 3QFY20 due to provision for doubtful debts and mark to market losses on commodity derivatives.

• Going forward, IOI expects its plantation earnings in 4QFY20 to be similar to that of 3QFY20 as higher palm production would mitigate weaker CPO prices. In the oleochemical division, higher demand for personal hygiene products is expected to partly offset the reduced demand for non-healthcare products in FY20F.

Source: AmInvest Research - 28 May 2020