Investment Highlights

• We maintain HOLD on IOI Corporation with unchanged forecasts and fair value of RM3.55/share. Our fair value for IOI is based on a FY23F PE of 18x. We ascribe a 3 star ESG rating to IOI.

• IOI’s specialty fats and oleochemical operations in the EU have not been affected by the shortage of gas so far. The utilisation rate of the oleochemical plant in Germany is 70% to 80% currently while the specialty fats plant is operating as usual. IOI owns a 20% stake in the specialty fats company, Bunge Loders Croklaan.

• In spite of this, we forecast IOI’s FY23F manufacturing EBIT (refining and oleochemicals) to decline by 12% to RM466mil. We have assumed a weaker manufacturing EBIT margin of 3% in FY23F vs. 3.5% in FY22. We believe that IOI’s manufacturing earnings would fall in FY23F due to lower demand and selling prices.

• As for the plantation division, we have assumed that IOI’s FFB output would improve by 6% in FY23F after falling by 6.6% in FY22. The increase in FY23F FFB production is expected to be driven mainly by a higher number of workers.

• So far this year, IOI has received 600 workers, mainly from Indonesia and Nepal. The group expects to receive another 900 workers by year end. This is envisaged to reduce IOI’s labour shortage from 30% to 20%. Most of the new workers are from Indonesia and Nepal.

• We reckon that IOI’s CPO production costs (EBIT level) would increase to RM2,500/tonne in FY23F from RM2,300/tonne in FY22 due to higher costs of fertiliser and wages. We believe that IOI’s FY23F fertiliser costs will surge by more than 10%. Global fertiliser prices are anticipated to remain high dragged by global shortages.

• IOI is expected to replant about 5,000ha to 7,000ha of ageing oil palm trees in FY23F vs. 5,000ha in FY22. Replanting cost is estimated to be RM18,000/ha.

• Although IOI completed its labour audit last year, the group will be carrying out an internal audit again in FY23F. The criteria in the labour audit are based on the 11 ILO (International Labour Organisation) indicators such as withholding of wages, physical intimidation and threats. To reduce greenhouse gas emissions, IOI will be building another 4 biogas plants. IOI hopes to reduce its GHG emissions to zero by 2030F.

• IOI is currently trading at a fair FY23F PE of 19x, which is slightly lower than its 2-year average of 22x.

Source: AmInvest Research - 30 Sept 2022