Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value (FV) of RM4.20/share based on an FY22F PE of 22.0x. We ascribe a three-star ESG rating to IOI.

• IOI is expected to announce the appointment of an auditor for its labour practices soon. Under phase 1 of the audit process, IOI will be updating its labour policies. Under phase 2, the auditor will be carrying out physical checks at some of IOI’s oil palm estates in Malaysia. IOI has also set up a sustainability forum, with representatives from government labour agencies, the MSPO and RSPO, amongst others. The forum is chaired by BSR, which is an international organisation of sustainable business experts.

• In respect of allegations of forced labour and poor housing conditions by Andy Hall and Finnwatch, IOI has resolved most of the issues. Incidentally, about 80% of IOI’s estate workers will be fully vaccinated by the end of October 2021.

• Currently, IOI faces a labour shortage of 9%. The labour shortage is more prevalent in Peninsular Malaysia than Sabah. To address the issue, IOI will be accelerating the mechanisation of fruit evacuation in its oil palm estates in Peninsular Malaysia. This includes the usage of mechanical buffaloes and motorized wheel barrows.

• We have assumed that IOI’s FFB production would be flat at 2.9mil tonnes in FY22F in contrast to a 5.8% fall in FY21 as a marginally higher FFB yield compensate for smaller mature areas. IOI’s net mature areas are estimated to decline by 3.0% in FY22F due to the replanting of ageing oil palm trees. IOI is envisaged to replant about 7,000ha in Sabah in FY22F vs. 7,600ha in FY21. We forecast an average FFB yield of 21.0 tonnes/ha in FY22F vs. 20.8 tonnes/ha in FY21.

• Earnings of the manufacturing division (palm refining and oleochemicals) are expected to improve in FY22F. We believe that IOI would be able to pass on the higher costs of raw materials in the form of increased selling prices in FY22F. We think that more than 60% of IOI’s oleochemical products comprise basic fatty acid products while the balance consists of higher value-added products for industries such as pharmaceuticals.

• We have assumed that IOI’s manufacturing EBIT margin would be unchanged at 2.5% in FY22F. Manufacturing revenue is estimated to grow by 10.0% to RM12.0bil in FY22F as IOI’s new oleochemical plant in Penang (110,000 tonnes per year) would be commissioned in 2HFY22.

Source: AmInvest Research - 9 Sept 2021