Investment Highlights

• We maintain HOLD on IOI Corporation with a higher fair value of RM3.85/share vs. RM3.55/share previously. We are now using IOI’s FY24F EPS of 21.3 sen from FY23E to derive its fair value, pegged to an unchanged FY24F PE of 18x, in line with its 5-year average. We have a 3-star ESG rating for IOI.

• IOI’s labour shortage is expected to ease to 10% in 2023F from the peak of 30% last year. However, we believe that the impact of the higher number of workers on IOI’s FFB production would only be felt in FY24F. This is because IOI’s foreign workers only started arriving in 2H2022.

• As such, we reckon that IOI’s FFB production would be flat in FY23E (1HFY23: -5%) before improving by 6% in FY24F. We believe that IOI’s FFB production would start rising YoY in 2HFY23. In 2022, IOI received 1,400 workers from Indonesia and Nepal.

• Due to the higher number of workers, we think that IOI’s cost of production (ex-depreciation and taxes) would increase to RM2,100/tonne in FY23F from RM2,000/tonne in FY22. We opine that the cost of wages would rise by 10% in FY23F while fertiliser costs would be 5% lower.

• Although the number of workers is rising, IOI will not be building more houses. There is sufficient housing as the new workers are replacing workers, who left in 2021 and 2022. However, IOI’s capex is still expected to increase as the group replants ageing oil palm trees and upgrades workers’ housing facilities.

• IOI’s capex is anticipated to be RM500mil in FY23F compared with RM439mil in FY22. About 60% of the capex is for the plantation division and the balance 40% for the manufacturing unit.

• We forecast IOI’s manufacturing (refining and oleochemicals) EBIT to fall by 7% to RM466mil in FY23F. We believe that the oleochemical division would be affected by lower selling prices and weaker sales volume in FY23F.

• We have assumed a manufacturing EBIT margin of 3% for IOI in FY23F vs. 3.3% in FY22. About two thirds of IOI’s manufacturing earnings are from oleochemicals while the balance 33% from refining.

• IOI is currently trading at a FY24F PE of 19x, which is in line with its 2-year average.

Source: AmInvest Research - 12 Jan 2023