During a recent virtual briefing with IOI Corp, management has shared some mixed outlook on the Group’s core businesses. Management is upbeat on its FFB production growth with an overall growth of 12% YoY for FY24. Production cost is also expected to be lower on the back of a decline in fertilizer cost. However, downstream outlook remains challenging given the stiff competition from Indonesia. Maintain Neutral with an unchanged SOP-based TP of RM4.24.

• FY23 results overview. All-in CPO cost of production for FY23 was RM400/mt higher at RM2,900/mt (inclusive PK-credit: RM400/mt), mainly due to i) higher cost in fertilizer, ii) more new hiring of foreign workers, iii) lower production yield and iv) diesel cost was higher. Out of the RM660m operating profit for resource-based manufacturing segment, refinery and oleochemical sub-segments, contributed 39% and 52%, respectively. On the plantation age profile, Malaysia’s oil palm plantation stands at 14.8 years while the Group’s age profile average at 14 years. It completed 100% of the fertilizer application target for FY23 following a strong catch up in the final quarter.

• Seeing positive growth for upstream plantation. On the FFB production outlook, management projects high single-digit growth for Malaysia and 20% growth for Indonesia, bringing the full-year average growth to 12%. It also predicts that FFB production could see a delayed peak in Nov. Meanwhile, CPO production cost is expected to be lower by at least RM300/mt, led by higher production yield and lower fertilizer cost, which made up about 16% of the total production cost. Based on the fertilizer tender for 1HFY24, the cost has reduced by 40% YoY. After achieving replanting size of 9,000ha for FY23, the Group has set a higher target of 10,000-11,000ha (replanting cost up to maturity: RM20k/ha) for FY24 while it is also eyeing a reasonable FFB yield of 23.5mt/ha, a significantly increase from FY23’s 18.66mt/ha.

• Tougher outlook for downstream manufacturing segment. The refining margin has seen a sharp decline since Feb due to favourable export tax policy in Indonesia, resulting in stiffer competition for the Malaysian refiners. Meanwhile, oleochemical margin remains depressed, dragged by the by-product glycerin, which has turned into a negative margin. The capacity utilization for refinery and oleochemical currently stands at 50%-60% and 70%-80%, respectively. Meanwhile, its new fatty acid and soap noodles plants in Prai, Penang have already commenced operation with capacity utilization of 40%-50%.

• Capex guidance. Management has set aside RM600m capex for FY24 for the upstream replanting activities and downstream expansion. Lastly, it has a total of 16,000 foreign workers in Malaysia and it is in the midst bringing in another 20% new foreign workers.

Source: PublicInvest Research - 29 Aug 2023