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 attach a 3-star ESG rating to IOI.

• IOI’s 1HFY24 core net profit of RM600.4mil (ex-unrealised net forex gain of RM41mil) was within our forecast and consensus estimates.

• IOI’s core net profit fell by 33.2% YoY to RM600.4mil in 1HFY24 as palm product prices eased and manufacturing earnings (refining and oleochemicals) slumped.

• Plantation EBIT (excluding associates and fair value changes) sank by 16% YoY to RM520.3mil in 1HFY24 as average CPO price retreated by 13% to RM3,736/tonne. On a positive note, FFB production expanded by 7.9% YoY in 1HFY24.

• Manufacturing earnings (excluding associates and fair value changes) (refining and oleochemicals) plummeted by 91.3% YoY to RM48.5mil in 1HFY24. Manufacturing EBIT margin fell to 1.1% in 1HFY24 from 8.2% in 1HFY23.

• We attribute the decline in manufacturing EBIT in 1HFY24 to a drop in selling prices and demand. Demand for oleochemical products is soft currently due to de-stocking and weak global economy. Also, refining margins are poor, dragged by stiff competition from Indonesia.

• Comparing 2QFY24 against 1QFY24, IOI’s core net profit was flat at RM300.2mil. Manufacturing EBIT rebounded to RM33.2mil in 2QFY24 from RM15.3mil in 1QFY24 on higher refining profits. EBIT margin inched up to 1.5% in 2QFY24 from 0.7% in 1QFY24.

• FFB output expanded by 11.5% QoQ in 2QFY24. Average CPO price was RM3,689/tonne in 2QFY4 vs. RM3,789/tonne in 1QFY24.

• In its results announcement, IOI expects low or negative refining margins to persist due to overcapacity in the refining industry in Indonesia. Also, the outlook for the oleochemical industry is challenging as the global economy faces uncertainties. In addition, the recent attacks in Red Sea have resulted in shipping disruptions and increased freight costs.

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

Source: AmInvest Research - 26 Feb 2024