Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.30/share previously. Our fair value for IOI is based on an FY21F PE of 27x.
• We consider IOI’s 1QFY21 core net profit to be within our expectations as CPO prices are expected to be higher in 2QFY21. Our FY21F earnings forecast for IOI is relatively unchanged. Although we have reduced our EBIT margin assumption for IOI’s manufacturing division to 5.5% from 6.0% for FY21F, we have raised our CPO price assumption to RM2,500/tonne from RM2,300/tonne.
• IOI reported a lower core net profit of RM179.4mil (ex-forex gain of RM98.5mil) in 1QFY21 vs. RM204.9mil (ex-forex loss of RM55.9mil) in 1QFY20.
• IOI was dragged by a 71.0% YoY plunge in manufacturing (refining and oleochemical activities) EBIT (including share of profit in associates and fair value changes in derivative contracts) in 1QFY21. Manufacturing EBIT was RM39.6mil in 1QFY21 vs. RM136.5mil in 1QFY20.
• We believe that the manufacturing division was affected by higher costs of feedstock arising from the surge in CPO prices in 1QFY21. Also, demand for non-healthcare oleochemical products may have been weak in 1QFY21 due to Covid-19. In addition, the manufacturing division recorded a larger fair value loss of RM49.8mil on derivative contracts in 1QFY21 vs. RM3.5mil in 1QFY20.
• Manufacturing EBIT margin slid to 1.7% in 1QFY21 from 8.0% in 1QFY20. Comparing 1QFY21 against 4QFY20, manufacturing EBIT margin shrank to 1.7% from 5.0%.
• In the results announcement, IOI said that refining and fractionation margins are expected to be negative or near breakeven level in FY21F due to the high CPO prices and low sales during the winter months in the Northern Hemisphere. The oleochemical segment is also envisaged to face a squeeze in product margins due to the rapid rise in the prices of palm kernel oil and palm stearin.
• On a positive note, IOI’s plantation EBIT (including associates and fair value changes) surged to RM273.6mil in 1QFY21 from RM126.6mil in 1QFY20 on the back of healthy palm product prices and CPO production. Average CPO price realised rose to RM2,579/tonne in 1QFY21 from RM2,014/tonne in 1QFY20. FFB production growth was 9.6% YoY in 1QFY21.
• IOI expects a good performance from the plantation division in 2QFY21 and 3QFY21 on the back of robust CPO prices. IOI also said that although its operations have not been directly affected by the CMCO, the freeze on new intake of foreign workers has resulted in a labour shortage, which has become more severe in recent months.

Source: AmInvest Research - 17 Nov 2020