IOI Corp posted 1HFY24 core earnings of RM603m after stripping out i) net foreign currency (FX) translation gain on foreign current denominated borrowings and deposits (RM35.2m), ii) net fair value gain on derivative financial instrument (RM29.8m), iii) FX loss (RM34.5m), iv) fair value gain on other investments (RM12.4m), v) net loss airing from changes in fair value of biological assets (RM12m) and MI (RM5.5m). The weaker results were below our full-year expectation but was in line with the market expectation, making up 43% and 45%, respectively. In view of the softer earnings outlook from the resource-based segment, we cut our FY24-26F earnings forecasts by 15%- 18% to reflect the weaker refining margin. Maintain Neutral with a lower SOPbased TP of RM4.08. A first interim DPS of 4.5sen was declared.

• 2QFY24 revenue (QoQ: +8.7%, YoY: -27.5%). Group revenue retreated 27.5% YoY to RM2.4bn, mainly attributed to weaker resource-based manufacturing (-28.9%) segment. 2QFY24 Average CPO price slipped from RM4,127/mt to RM3,689/mt (1HFY24: RM3,736/mt, YoY: -12.9% YoY) while FFB production rose 5.9% YoY to 818,811mt (1HFY24: 1.55m mt, YoY: +7.9%). 1HFY24 oil extraction rate improved from 20.91% to 21.91%. Resource-based manufacturing sales dropped 28.9% YoY to RM2.2bn, as sales volume from refinery sub-segment declined 14% to 376,000mt despite stronger oleochemical sales volume, up 6%.

• 2QFY24 core profit shrank 37.5% YoY to RM305m. The Group posted lower core earnings of RM304.5m, down 37% YoY, as resource-based manufacturing earnings slumped 81% YoY to RM53.5m, dampened by lower margins from oleochemical and refining sub-segments. Plantation earnings were marginally higher at RM330m, supported by lower production cost and higher FFB production. 1HFY24 CPO production cost (inclusive PK credit) dropped by RM150/mt to RM2,030/mt.

• Mixed outlook. Management expects CPO price to increase to above RM4,000/mt in the next 2 months in anticipation of a surge in demand during the Ramadan period. However, the projected bumper harvest for soybean in the middle of this year could put some pressure on CPO price in the 2H of 2024. During the 1HFY24, fertilizer application was on track with more than 50% completed. It has replanted more than 4,000 ha and it is confident to replant up to 8,000 ha for FY24. For FY24, it expects CPO production down to soften from RM2,300/mt to RM2,100/mt, led by higher FFB yield and a decline in fertilizer cost (YoY: -20%). 
  
  On the other hand, refinery and commodity marketing sub-segment are expected to remain at current low level or even at negative margins persists due to overcapacity of refineries in Indonesia coupled with their favourable export tax policy. Malaysia’s refinery is currently running at negative margin. The outlook for oleochemical sub-segment is expected to remain subdued due to the weak demand from Germany and a surge in freight cost following the recent Red Sea attack.

Source: PublicInvest Research - 26 Feb 2024