Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged value of RM4.20/share. Although we have raised IOI’s FY22F EPS by 13.4% to account for a higher average CPO price assumption of RM3,500/tonne vs. RM2,800/tonne previously, we have also lowered our PE assumption to 22.0x from 25.0x. This is to reflect the de-rating of the palm oil sector due to ESG risks.

• IOI’s FY21 core net profit (ex-forex and disposal gains of RM393.3mil) of RM1.0bil was within our forecast but 10% below consensus estimates. Included in IOI’s reported net profit was Loders Croklaan’s gain of RM267.9mil on the disposal of a palm refinery in Rotterdam to Neste.

• IOI has declared a final gross DPS of 6.0 sen for 4QFY21, which brings total gross DPS to 10.5 sen for FY21 (FY20: 8.0 sen). We forecast a higher gross DPS of 11.0 sen for FY22F, which implies a yield of 2.8%.

• IOI’s core net profit rose by 23.8% to RM1.0bil in FY21 on the back of higher plantation earnings. Plantation EBIT (exassociates and fair value changes) rose by 77.8% to RM1,076.5mil in FY21 underpinned by a 32.9% climb in average CPO price realised.

• IOI’s average CPO price realised was RM3,076/tonne in FY21 compared with RM2,314/tonne in FY20. FFB production growth was -5.8% in FY21.

• IOI’s manufacturing EBIT (oleochemicals and refining) (excluding associates and fair value changes) slid by 13.8% to RM276.3mil in FY21 dragged by higher costs of raw materials and weaker refining margins. EBIT margin was 2.5% in FY21 vs. 4.2% in FY20. We believe that most of the manufacturing earnings are from the oleochemical division.

• Looking ahead, IOI said that its FFB production would remain stable in FY22F as higher output from the young trees in Indonesia would offset production loss from the replanting programme in Sabah. IOI has also accelerated its mechanisation programme in the oil palm estates to alleviate the shortage of workers.

• IOI also said that stronger-than-expected palm feedstock price will moderate its operating profit margin in the manufacturing division. On a positive note, the new fatty acid plant in Penang will come onstream in 2HFY22, which would contribute to sales volume and margin enhancements in the long term.

Source: AmInvest Research - 25 Aug 2021