Investment Highlights

• We maintain HOLD on IOI Corporation with a higher fair value of RM3.90/share vs. RM3.85/share previously. Our fair value for IOI is now based on a rolled-forward FY24F PE of 18x instead of FY23F originally. The PE of 18x is the 5-year mean for big cap planters. We ascribe a 3 star ESG rating to IOI.

• On an annualised basis, IOI’s 1HFY23 core net profit (exunrealised net forex loss of RM19.8mil) was 46%above our FY23F earnings and 19% above consensus estimates.

• The group’s results exceeded expectations due to stronger-than-expected manufacturing earnings (oleochemicals and refining). Hence, we raise IOI’s FY23F net profit by 39% to account for a higher manufacturing EBIT margin of 5% vs. 2% previously.

• Manufacturing EBIT (including associates and fair value changes) surged by more than 2-fold QoQ to RM464.3mil in 2QFY23 on the back of fair value gains on derivatives of RM182.6mil. In contrast, there were fair value losses of RM193mil in 1QFY23.

• Excluding the fair value changes, manufacturing EBIT would have slid by 39.8% QoQ to RM281.7mil in 2QFY23 due to lower oleochemical profit margins.

• IOI’s 1HFY23 core net profit rose by 17% YoY to RM899.4mil as an increase in manufacturing profits more than compensated for a decline in plantation earnings.

• Manufacturing EBIT surged by more than 2-fold YoY to RM592.8mil in 1HFY23 in the absence of impairments at Bunge Loders. EBIT margin rose to 8.7% in 1HFY23 from 2.6% in 1HFY22. Fair value losses on derivatives narrowed to RM10.4mil in 1HFY23 from RM54.2mil in 1HFY22.

• The plantation division was affected by higher costs of production and a lower volume of CPO production, with FFB production declining by 5% YoY in 1HFY23. As such, plantation EBIT (including associates and fair value changes) dived 36% YoY to RM680mil in 1HFY22.

• We believe that IOI’s cost of production (EBIT level) will rise to RM2,500/tonne in FY23F from RM2,300/tonne in FY22. Average CPO price realised was RM4,294/tonne in 1HFY23 vs. RM4,305/tonne in 1HFY22.

• IOI is currently trading at a fair FY24F PE of 18x, which is in line with its 2-year average.

Source: AmInvest Research - 1 Mar 2023