Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.05/share. Our fair value for IOI is based on a FY23F PE of 22x. We ascribe a 3-star ESG rating to IOI.

• IOI is currently facing a labour shortage of about 20%. Most of the labour shortage takes place in Peninsular Malaysia. To alleviate the problem, IOI has mechanised its estate processes in Peninsular Malaysia. On a positive note, IOI has received approvals to recruit 800 workers from Indonesia and Nepal. We think that the foreign workers would arrive in Malaysia in July.

• We have assumed that IOI’s FFB production would fall by 4.5% in FY22E (10MFY22: -4.2%) and then recover by 4% in FY23F. The improvement in IOI’s FY23F FFB output is expected to be underpinned by good rainfall in FY22E, dissipating lagged effects of haze and drought in 3Q2019, together with the arrival of foreign workers. IOI’s FFB production has been falling since FY19.

• We think that IOI’s cost of production (ex-mill) would increase to RM1,600/tonne in FY22E (FY21: RM1,500/tonne) and more than RM2,000/tonne in FY23F due to higher costs of fertiliser and wages. Fertiliser costs have doubled this year while higher minimum wage is expected to increase the cost of production by 2% to 3%. IOI has not reduced its fertiliser application even though fertiliser costs have surged.

• We understand that the volatility in palm product prices resulted in the erosion in the EBIT margin of the refining unit in 3QFY22. Also, 30%-owned Bunge Loders was affected by fair value losses in derivatives. Going forward, as CPO prices have declined, we reckon that there could be a recovery in the EBIT margin of the downstream division (refining and oleochemicals).

• Construction of IOI’s new oleochemical plant in Penang is anticipated to be completed in 3Q2022. The oleochemical plant is expected to increase IOI’s production capacity by 110,000 tonnes to 890,000 tonnes per year. We forecast IOI’s manufacturing revenue to increase by 10% to RM13.1bil in FY23F due to the commissioning of the oleochemical plant. However, we do not expect the plant to be profitable in the first year of operation as it takes time to ramp up utilisation rates.

• We estimate IOI’s gross DPS to be 15 sen in FY22E vs. 10.5 sen in FY21 as the group’s core net profit is expected to climb by 32.3% to RM1.5bil. The gross DPS of 15 sen implies a pay-out of 63% compared with 58% in FY21.

Source: AmInvest Research - 20 Jun 2022