Investment Highlights

• We maintain HOLD on IOI Corporation with a lower fair value of RM4.00/share vs. RM4.08/share previously. We have reduced IOI’s net profit by 11% for FY24F and 3% for FY25F to account for weaker manufacturing contribution. Our fair value for IOI is based on a FY25F PE of 18x, which is the 5-year average for big-cap planters. We ascribe a 3- star ESG rating to IOI.

• The outlook for the oleochemical industry is challenging currently due to fierce competition from Indonesia. In addition, in China, a new oleochemical plant has started commissioning and this may further affect demand for oleochemical products from Malaysia. In June 2023, Apical Oleochemical Co commenced operations in Taixing, Jiangsu. The plant has an annual production capacity of 600,000 tonnes.

• As such, we forecast IOI’s manufacturing (refining and oleochemicals) EBIT to fall by 37% to RM414mil in FY24F. We have assumed a manufacturing EBIT margin of 3.5% in FY24F vs. 5.9% in FY23. Revenue however, is expected to grow by 5% in FY24F, underpinned by the commissioning of a new oleochemical plant in Penang. The new plant has a production capacity of 110,000 tonnes per year.

• On a positive note, IOI’s FY24F plantation division is expected to enjoy higher FFB production and lower production costs. These should mitigate the negative impact of softer CPO prices. We have assumed an average CPO price of RM3,800/tonne for FY24F compared with the price of RM4,118/tonne realised in FY23.

• We reckon that IOI would achieve a FFB output growth of 7% in FY24F vs. -1.5% in FY23, supported by a full estate workforce. Also, IOI’s all-in CPO production costs are estimated at RM2,300/tonne in FY24F vs. RM2,500/tonne in FY23. Fertiliser costs are envisaged to fall by 30%-40% in FY24F.

• Capex is expected to be RM600mil in FY24F compared with RM605mil in FY23. 60% of the capex is anticipated to be for plantation with the balance 40% for the manufacturing division. IOI is envisaged to have 10,000ha-11,000ha of ageing oil palm trees in FY24F. Replanting cost until maturity is estimated at RM20,000/ha-RM25,000/ha.

• IOI is currently trading at a FY24F PE of 19x, which is slightly higher than its 2-year average of 18x.

Source: AmInvest Research - 3 Oct 2023