Investment Highlights

• We maintain HOLD on IOI Corporation with a lower fair value of RM3.95/share vs. RM4.20/share previously. We have reduced IOI’s FY22F net profit by 6.8% to account for a higher effective tax rate resulting from the prosperity tax in Malaysia and the tax on overseas dividend income.

• Our fair value for IOI is based on a FY23F PE of 22.0x. We have used IOI’s FY23F net profit to arrive at its fair value instead of FY22F as IOI’s effective tax rate is expected to decline to 26% in FY23F from 31% in FY22F. We ascribe a three-star ESG rating to IOI.

• IOI’s 1QFY22 core net profit (ex-unrealised forex losses of RM26.3mil) waswithin our original forecast and consensus estimates.

• IOI’s core net profit rose by 69.4% YoY to RM303.9mil in 1QFY22 on the back of strong plantation and manufacturing earnings. Plantation EBIT (ex-associates and fair value changes) climbed by 72.5% YoY to RM407.8mil in 1QFY22 while manufacturing EBIT (exassociates and fair value changes) improved by 97.6% to RM142.9mil.

• IOI benefited from higher palm product prices in 1QFY22. Average CPO price realised grew by 56.3% to RM4,032/tonne in 1QFY22 from RM2,579/tonne in 1QFY21. On a negative note, FFB production plunged by 15.1% YoY in 1QFY22.

• We believe that IOI’s manufacturing division (oleochemicals and palm refining) enjoyed higher sales volume and selling prices of oleochemical products. EBIT margin rose to 4.0% in 1QFY22 from 3.0% in 1QFY21.

• Comparing 1QFY22 against 4QFY21 however, IOI’s manufacturing EBIT plunged by 88.8% to RM46.1mil if the fair value losses of RM108.7mil were included. The fair value losses related mainly to commodity forward contracts.

• Looking ahead, IOI said that its CPO production would be lower than anticipated in FY22F due to the wet weather and labour shortage. However, the performance of the refining segment is expected to be satisfactory in FY22F on the back of positive processing margins.

• As for the oleochemical segment, high raw material prices and freight costs have been challenging. Nevertheless, IOI hopes to mitigate these by improving cost efficiencies and enhancing productivity.

Source: AmInvest Research - 25 Nov 2021