IOI Corp posted a marginal drop in 9MFY23 core earnings to RM1.27bn after stripping out i) net foreign currency (FX) translation loss on FX denominated borrowing and deposits (RM3m), ii) FX loss (RM106m), iii) fair value gain on other investments (RM3.5m), iv) fair value loss on derivatives financial instruments (RM96.1m), v) net loss arising from changes in fair value of biological assets (RM14.8m) and vi) gain on disposal of 10% equity interest of an associate (RM17.2m). The results were above the street full-year expectation but in line with our expectation, making up 82% and 70%, respectively. Nevertheless, we cut our FY23F earnings forecast by 13% after lowering the margin assumption. We maintain Neutral with an unchanged SOP-based TP of RM4.24. No dividend was declared for the quarter.

• 3QFY23 revenue (QoQ: -19%, YoY: -36%). Group revenue retreated 36% YoY to RM2.7bn, attributed to weaker sales from both plantation (- 36%) and resource-based manufacturing (-35%) segments. Average CPO price recorded in the 3QFY23 contracted from RM5,064/mt to RM3,928/mt (9MFY23: RM4,181/mt, YoY: -7.4%) while FFB production rose 4.8% YoY to 628,289 mt (9MFY23: 2.06mt, YoY: -2.2%). Resource based manufacturing sales tumbled 35% YoY to RM2.6bn, weighed by lower sales volume from the oleochemical sub-segment.

• 3QFY23 core profit shrank to RM224m. The Group posted lower core earnings of RM224m, down 38% YoY, dragged by weaker plantation earnings, partially offset by stronger resource-based earnings. Plantation earnings tumbled 55% YoY to RM227m, attributed to higher production cost as palm kernel price saw a sharp decline. Meanwhile, resource based manufacturing earnings surged 76% YoY to RM111m on the back of higher contribution from the refining sub-segment with better margins despite lower margins from oleochemical sub-segment.

• Outlook guidance. Management expects to see CPO prices to remain in the range of RM3,500-RM3,700/mt level in the next 3 months due to the looming El Nino weather pattern, which affects the production in 4Q 2023. Meanwhile, its refining and fractionation margins have been squeezed to a negative level due to the high CPO export duty in Indonesia as well as narrower gap between palm oil and soybean oil prices. Despite softer raw material prices, the steep electricity hike in Malaysia coupled with the weaker demand from the US and European markets have dampened the oleochemical business. The performance of the specialty fats, which is under the associate of Bunge Loders Croklaan, is expected to remain healthy as it has acquired a new refinery in New Orleans, US. In short, management sees downside risk in the 4Q financial performance.

Source: PublicInvest Research - 31 May 2023