Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.10/share, based on FY25F PE of 18x, which is the 5-year average for large-cap planters. We ascribe a 3-star ESG rating to IOI.

• We believe that IOI’s FFB production growth would be positive for the first time in FY24F since the increase of 11.4% in FY18. IOI’s FFB production fell by an average of 5% per year from FY19 to FY23. This was mainly due to the drought in 3Q2019 and labour shortage from FY21 to FY23.

• We think that IOI’s FFB output would expand by 7% in FY24F (1HFY24: 7.9% YoY) compared with a decline of 1.5% in FY23. We have assumed an average FFB yield of 19.5 tonnes/ha in FY24F vs. 18.7 tonnes/ha in FY23.

• The recovery in FFB yields in FY24F is expected to be underpinned by a higher number of harvesters. Recall that foreign workers started arriving in Malaysia from end-2022 to mid-2023. The impact of El Nino is not envisaged to be severe as rainfall was sufficient in Sabah and Peninsular Malaysia last year. IOI’s exposure to Indonesia is small.

• On the back of a higher volume of CPO production and lower fertiliser costs, we believe that IOI’s cost of production (EBIT level) would ease to RM2,500/tonne in FY24F from RM2,709/tonne in FY23. According to Bloomberg, the average price of US corn belt granular potash was US$394/tonne in 2H2023, 42.6% lower than the average of US$687/tonne in 2H2022.

• As for the manufacturing division (refining and oleochemicals), we believe that global demand for oleochemical products would improve in 2H2024 as interest rates plateau or decline. Hence, we forecast IOI’s manufacturing EBIT to recover by 6% in FY25F after plummeting by 37.4% in FY24F.

• IOI commissioned its new oleochemical plant in Penang in July 2023. The plant, which has a production capacity of 110,000 tonnes per year, is more efficient than IOI’s older plants. The plant produces mainly basic fatty acids and caters to companies in Asia Pacific and Europe. Average utilisation rate of IOI’s oleochemical division is 60%.

• IOI is presently trading at a FY25F PE of 17x, which is slightly lower than its 2-year average of 18x.

Source: AmInvest Research - 16 Jan 2024