Investment Highlights

• We maintain HOLD on IOI Corporation with a higher fair value of RM3.55/share vs. RM3.30/share previously. We raise IOI’s FY23F net profit by 7.5% to account for higher manufacturing revenue. Our fair value for IOI is based on a FY23F PE of 18x. We attach a 3-star ESG rating to IOI.

• IOI has declared a final gross DPS of 10 sen, which brings total gross DPS to 14 sen (FY21: 10.5 sen). This implies an FY22 dividend yield of 3.3%.

• IOI’s FY22 core net profit (ex-unrealised forex losses of RM12.8mil) of RM1.7bil was 16.7% above our expectations but within consensus estimates. The discrepancy between IOI’s core net profit and our forecast was due to a strong rebound in the group’s manufacturing EBIT in 4QFY22. IOI attributed the recovery to an improvement in refining margins.

• Manufacturing EBIT (including fair value changes and associates) surged to RM292.6mil in 4QFY22 from RM45.8mil in 3QFY22 while EBIT margin improved to 8.1% in 4QFY22 from 1.2% in 3QFY22.

• Comparing FY22 against FY21, IOI reported a stronger core net profit of RM1.7bil in FY22 vs. RM1.1bil in FY21. Bumper plantation earnings compensated for lower manufacturing earnings (refining and oleochemicals) in FY22.

• Plantation EBIT (including associates and fair value changes) climbed by 2.1x YoY to RM2.1bil in FY22 on the back of robust palm product prices. Average realised CPO price was RM4,688/tonne in FY22, 52.4% higher than the RM3,076/tonne achieved in FY21. On a negative note, FFB output declined by 6.6% in FY22.

• Manufacturing core EBIT (ex-Bunge Loders’ disposal gains in FY21) slid by 16.6% to RM537.3mil in FY22 from RM644.5mil in FY21. This was mainly due to an asset impairment of RM55.3mil at Bunge Loders. We believe that Bunge Loders also suffered an erosion in operating profit margins in its core operations. IOI’s manufacturing EBIT margin eased to 3.6% in FY22 from 8.4% in FY21.

• Going forward, IOI said that China’s zero-Covid policy will continue to dampen the country’s demand for oleochemical products. Nevertheless, with IOI’s new fatty acid and soap noodles plants coming onstream in 2H2022, sales volume is expected to increase by double-digit percentage in FY23F but at lower margins compared to FY22.

Source: AmInvest Research - 24 Aug 2022