Investment Highlights

• We maintain HOLD on IOI Corporation with a lower fair value of RM4.20/share vs. RM4.30/share previously. To arrive at IOI’s fair value, we have assumed a lower FY22F PE of 25x vs. 27x originally. We have ascribed a lower PE as ESG concerns are expected to drag the sector PE for palm oil companies.

• However in terms of forecast, we have raised IOI’s FY21F net profit by 6.6% to account for higher plantation profits but lower manufacturing EBIT. We have assumed a higher CPO price assumption of RM3,000/tonne compared with RM2,500/tonne originally for the plantation division. On the flip side, we have reduced our manufacturing EBIT assumption to 4.2% from 4.5% for FY21F due to higher costs of raw materials.

• We consider IOI’s 1HFY21 core net profit (ex-forex gains of RM193.8mil) to be slightly above our original forecast but within consensus. We believe that IOI’s FY21F core net profit beat our original estimates as CPO prices are expected to improve in 3QFY21.

• IOI’s core net profit rose by 32.2% YoY to RM439.8mil in 1HFY21 driven by the plantation division. Plantation EBIT (including fair value changes and share of profit in associates) surged by 103.3% YoY to RM613.9mil in 1HFY21 on the back of an increase in palm product prices. Average CPO price realised was RM2,782/tonne in 1HFY21 compared with RM2,128/tonne in 1HFY20.

• IOI’s FFB production grew by 2.5% YoY in 1HFY21.

• On a negative note, IOI’s manufacturing EBIT (including share of profit in associates and fair value changes in derivatives) contracted by 63.5% YoY to RM60.8mil in 1HFY21.

• The manufacturing division (refining and oleochemicals) was affected by larger fair value losses on derivatives of RM140.4mil in 1HFY21 (1HFY20 fair value losses were RM96.5mil). Also, we believe that the oleochemical division was hurt by high costs of raw materials. EBIT margin was 1.3% in 1HFY21 vs. 4.6% in 1HFY20.

• In the results announcement, IOI said that in spite of the big difference between the CPO export taxes of Malaysia and Indonesia, its palm refinery in Sabah is expected to perform satisfactorily in FY21F due to its efficient cost structure and contribution from palm kernel oil fractionation.

• However for the oleochemical segment, profit margins continued to be affected by the relatively high palm oil and palm kernel oil prices. On a positive note, the demand for oleochemical products is expected to improve going forward in line with the global economic recovery.

Source: AmInvest Research - 24 Feb 2021