Investment Highlights

• We maintain HOLD on IOI Corporation with a lower fair value of RM3.75/share vs. RM3.90/share previously. Our fair value for IOI is based on a FY24F PE of 18x, at parity to the 5-year mean for big cap planters. We ascribe a 3-star ESG rating to IOI.

• IOI’s annualised 9MFY23 core net profit (ex-unrealised net forex loss of RM3mil) was 27% below our forecast and 19% below consensus estimates. The group’s results were weak in 3QFY23 due to erosion in plantation and manufacturing EBIT margins. We have reduced IOI’s FY23E net profit by 22% and FY24F net earnings by 4% to account for these.

• Comparing 9MFY23 against 9MFY22, IOI’s core net profit declined by 4.7% to RM1.1bil due to a fall in plantation earnings.

• Plantation EBIT (inclusive of associates and fair value changes) slid by 43% YoY to RM901.2mil in 9MFY23, dragged by lower palm oil prices together with higher costs of fertiliser and wages. Hence, plantation EBIT margin shrank to 43.1% in 9MFY23 from 63.7% in 9MFY22.

• Average realised CPO price fell to RM4,181/tonne in 9MFY23 from RM4,518/tonne in 9MFY22. FFB production eased by 2.3% YoY in 9MFY23.

• On a positive note, manufacturing EBIT (inclusive of associates and fair value changes) surged by 3-fold YoY to RM643.6mil in 9MFY23 on the back of robust refining margins and absence of asset impairments. EBIT margin jumped to 6.9% in 9MFY23 from 2.1% in 9MFY22.

• Comparing 3QFY23 against 2QFY23, IOI’s core net profit plunged by 69.4% to RM180.6mil, dragged by higher costs of production, softer palm product prices and weaker manufacturing earnings. Average CPO price was RM3,928/tonne in 3QFY23 vs. RM4,127/tonne in 2QFY23. FFB production dived by 18.3% QoQ in 3QFY23.

• Manufacturing EBIT contracted by 89.1% QoQ to RM50.8mil in 3QFY23, dragged by erosions in refining and oleochemical margins. We believe that demand for oleochemical products is soft due to global economic uncertainties. EBIT margin fell to 2% in 3QFY23 from14.4% in 2QFY23.

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

Source: AmInvest Research - 31 May 2023