Investment Highlights

• We maintain HOLD on IOI Corporation with a higher fair value of RM4.05/share vs. RM3.95/share previously. Our fair value of RM4.05/share for IOI is based on an unchanged FY23F PE of 22.0x. We ascribe a three-star ESG rating to IOI.

• We have raised IOI’s FY22F net profit by 12.9% to account for a higher average CPO price of RM4,300/tonne vs. RM4,000/tonne originally. We have also increased IOI’s FY23F net profit by 2.6% to account for higher manufacturing EBIT margin. Our average CPO price assumption is RM3,000/tonne for FY23F.

• IOI’s core net profit (ex-unrealised forex losses/gains of RM3.4mil) in 1HFY22 was 17.2% above our earnings forecast and 14.6% above consensus estimates. The discrepancy between our forecast and actual core net profit was due to a higher-than-expected manufacturing EBIT margin and CPO price.

• IOI’s core net profit increased by 74.8% to RM768.9mil in 1HFY21 from RM439.8mil in 1HFY20 on the back of robust earnings from the plantation and manufacturing divisions. We believe that IOI’s core net profit would have been higher in 1HFY22 if the group did not record its share of impairment losses of RM55.3mil in Bunge Loders Croklaan and loss on repurchase of guaranteed notes due 2022 of RM29.4mil.

• Plantation EBIT (including associates and fair value changes) surged 73.2% YoY to RM1.1bil in 1HFY22 underpinned by strong palm product prices.

• Average CPO price realised grew by 54.7% to RM4,305/tonne in 1HFY22 from RM2,782/tonne in 1HFY21. On a negative note, IOI’s FFB production declined by 7.6% YoY in 1HFY22 due to a shortage of estate workers and unfavourable weather conditions.

• Manufacturing EBIT (including associates and fair value changes) improved by 227.1% YoY to RM198.9mil in 1HFY22 underpinned by higher sales of oleochemical products. Also, IOI recorded fair value gains of RM54.5mil on derivatives in 1HFY22 vs. losses of RM90.6mil in 1HFY21. EBIT margin rose to 2.6% in 1HFY22 from 1.3% in 1HFY21.

• Going forward, IOI said that the margins for its oleochemical products would be affected by the sharp rise in PKO prices. On a positive note, there is pent up demand for IOI’s oleochemical products. Hence, the division is expected to perform satisfactorily for the rest of FY22F.

Source: AmInvest Research - 24 Feb 2022