Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM3.95/share based on FY23F PE of 22.0x. We ascribe a three-star ESG rating to IOI. We have raised IOI’s FY22E net profit by 15.1% to account for a lower effective tax rate of 25% vs. 31% previously. IOI is not expected to be affected by the prosperity tax in Malaysia and tax on foreign source income.

• IOI was also not significantly affected by the recent floods. Only two estates in Pahang measuring 4,000ha were hit by the floods. It took two days for the flood waters to recede. The group’s oil palm estates in Sabah and Johor did not experience flooding.

• IOI has applied for the recruitment of a few thousand foreign workers this year. The arrival of the foreign workers (if any) is expected to help ease IOI’s labour shortage, which is 20% currently.

• To reduce reliance on foreign workers in the long term, IOI plans to mechanise the FFB collection process in all of its oil palm estates by 2027F. This means that grabbers and mechanised wheelbarrows will be used in all of IOI’s oil palm estates in Malaysia and Indonesia by 2027F. Currently, only 50% of IOI’s estates are mechanised.

• Incidentally, the auditor, who was engaged by IOI’s client, has completed the audit of IOI’s labour practices. So far, the US CBP has not announced a ban on IOI’s palm products yet. Recall that Andy Hall submitted a petition to the US CBP on allegations of forced labour in 2Q2021.

• Currently, we forecast IOI’s FFB production to fall by 4.5% to 2.8mil tonnes in FY22E (5MFY22: -9.8%). After a weak 1HFY22, IOI’s FFB output is expected to improve in the coming months driven by improvements in FFB yields

• We estimate IOI’s CPO cost of production (EBIT level) to be between RM1,750/tonne and RM1,800/tonne in FY22E vs. RM1,700/tonne in FY21. The increase in the cost of production per tonne is due to higher costs of fertiliser and a drop in the volume of production. We think that IOI’s fertiliser costs would climb by 15% to 20% in FY22E. On a positive note, palm kernel credits have surged and this will help cushion the rise in fertiliser costs.

• We anticipate IOI’s manufacturing EBIT to rise 8.0% to RM298.7mil in FY22E on the back of increased selling prices and sales volume. In terms of margins however, we have assumed that IOI’s manufacturing EBIT margin would be flat at 2.5% in FY22E as the cost of raw materials is expected to go up more than the increase in selling prices.

Source: AmInvest Research - 17 Jan 2022