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 an FY21F PE of 27x.
• IOI is facing a labour shortage of 5% to 10% currently. To alleviate this problem, the group has increased mechanisation and changed the workflow in some of the processes at the oil palm estates. For instance, harvesters are now focussing on harvesting FFB only instead of harvesting FFB and also picking up loose fruits. Other workers are now collecting loose fruits in addition to their normal workflow.
• In the longer term, the group plans to increase mechanisation further and reduce reliance on foreign workers by raising the productivity of its current workforce. The goal is to achieve a ratio of 1 worker to 10ha in the future from 1 worker to 8ha currently.
• Another long-term objective is to grow the oleochemical EBIT by RM100mil in the next four years. In FY20, IOI’s manufacturing EBIT was RM324.5mil (including fair value changes but excluding associates). To achieve this, IOI has started construction of a RM210mil oleochemical plant in Penang. The plant will command an annual production capacity of 110,000 tonnes upon completion at end-2021F.
• Also, IOI plans to increase production of higher valueadded oleochemical products in Germany, which can be used in the pharmaceutical industry. We think that currently, about 30% of IOI’s oleochemical products are produced for industries such as tyres and paints, which are vulnerable to economic conditions.
• Operationally, we forecast IOI’s FFB production to remain flat at 3.1mil tonnes in FY21F. IOI’s mature areas are forecast to decline by 4% or about 5,000ha (net basis) due to replanting of ageing oil palm trees.
• The group plans to replant about 10,000ha to 12,000ha of ageing oil palm trees in FY21F vs. 10,000ha in FY20. The increase in mature areas is estimated to be 6,000ha to 7,000ha in FY21F. Most of the replanting is expected to be carried out in Sabah.
• We reckon that IOI’s CPO ex-mill production cost would rise by RM20/tonne to RM50/tonne from RM1,500/tonne in FY21F. Fertiliser costs are envisaged to remain flat in FY21F while cost of wages may increase. We think that wages would have to rise to entice workers to stay on.

Source: AmInvest Research - 24 Sept 2020