Investment Highlights

• We recommend a HOLD on IOI Corporation with a fair value of RM4.30/share based on a FY21F PE of 27x. IOI is currently trading at a FY21F PE of 28.4x.

• We have reduced IOI’s FY20E net profit by 3.6% to account for weaker manufacturing (refining and oleochemicals) earnings. We believe that IOI’s manufacturing division would be affected by poor demand resulting from Covid-19 in 4QFY20.

• We envisage IOI’s manufacturing earnings to recover by 40.5% in FY21F after tumbling by 30.5% in FY20E. We have assumed manufacturing EBIT margins of 4.5% in FY20E and 6.0% in FY21F.

• IOI’s manufacturing earnings are expected to be weak in FY20E due to thin refining margins and a drop in sales volume of non-healthcare oleochemical products during the economic restriction period in various countries. IOI also faced logistics issues in some of the destination countries during the period.

• We believe that some customers deferred purchases during the lockdown in 1Q2020. However, as economies are gradually opening up, demand for non-healthcare oleochemical products is expected to improve from 3Q2020 onwards. Oleochemicals are estimated to account for 80% of IOI’s manufacturing EBIT in FY20E while refining is envisaged to make up the balance 20%.

• We have assumed that IOI’s FFB production would grow by 4% in FY21F after falling by 9% in FY20E (11MFY20: - 11.5%, FY19: -3.3%). We estimate IOI’s FFB yield to be 23 tonnes/ha in FY21F compared with 21.5 tonnes/ha in FY20E.

• IOI’s exposure to Sabah is significant. As such, the group’s FFB yield in Sabah in FY20E was sharply affected by the lagged impact of the drought and haze, which took place in 3Q2019.

• Sabah accounts for about 67% of IOI’s mature areas while Peninsular Malaysia accounts for another 26%. Indonesia makes up the balance 7% of IOI’s mature areas. We understand that IOI is not facing any labour shortage in its oil palm estates in Malaysia and Indonesia currently

Source: AmInvest Research - 10 Jul 2020