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 FY22F PE of 27x. We have reduced IOI’s FY21F net profit by 5.3% to account for an erosion in manufacturing EBIT (oleochemicals and refining) margin.
   
• We are now assuming a manufacturing EBIT margin of 4.5% in FY21F (FY20: 4.3%) vs. 5.0% previously as a higher feedstock cost may not be immediately passed on to customers in the form of higher selling prices. The manufacturing division is envisaged to account for 30% of IOI’s FY21F EBIT.
   
• IOI was not significantly affected by the floods in Johor. The group was prepared for the floods as they are a yearly occurrence. We understand that there were no issues with the weather at IOI’s oil palm estates in Sabah.
   
• In Central Kalimantan, there were heavy rains in November, which subsided in December. Also as IOI’s oil palm estates are mainly located in the west of Central Kalimantan, the group was not affected as much as other planters.
   
• We have assumed that IOI’s FFB production would be flat at 3.1mil tonnes in FY21F (1HFY21: 2.5% YoY) (FY20: - 8.9%). Although IOI’s FFB yields are expected to improve in FY21F, a fall in mature areas would affect the group’s FFB output.
   
• We think that mature areas would decline by 5,000ha on a net basis as IOI replants about 12,000ha of ageing oil palm trees in FY21F (FY20: 10,000ha). Replanting cost (until maturity) is estimated to be RM13,000/ha to RM20,000/ha depending on the terrain and the type of fertiliser and seedlings used.
   
• We believe that the deadline for the utilisation of proceeds from the disposal of Loders Croklaan is in 2H2021. Currently, the proceeds of RM925.0mil are allocated for investments. If IOI is unable to find investment opportunities at the right price, we think that the proceeds would be used to repay borrowings and/or pay additional dividends.
   
• Assuming half of the disposal proceeds are returned to shareholders, they would receive additional dividends of 7.0 sen per share. Currently, we forecast gross DPS of 8.5 sen for FY21F and 9.0 sen for FY22F. Assuming a total gross DPS of 15.5 sen for FY21F, this would translate into a yield of 3.6%.

Source: AmInvest Research - 25 Jan 2021