Investment Highlights

• Maintain HOLD on IOI Corporation with a lower fair value of RM4.30/share (vs. RM4.60/share previously). Our fair value is based on an FY19F PE of 25x.

• We have reduced IOI’s FY19F net profit by 6.5% to account for a weaker plantation EBIT margin of 48% vs. 50% originally. We believe that rising production costs coupled with falling CPO prices would erode IOI’s EBIT margin in FY19F.

• Although IOI is flushed with cash after the disposal of Loders Croklaan, we think that it would be challenging for IOI to acquire palm oil assets. The issue is pricing. Selling prices of planted landbank in Malaysia and Indonesia have remained high even though CPO prices have been falling. IOI’s last upstream expansion was the RM1bil acquisition of Unico-Desa Plantations in year 2013. IOI’s gross cash and cash equivalents stood at RM3.7bil as at end-March 2018.

• As for downstream expansion, we do not think this will materialise anytime soon. Based on IOI’s past track record, the group is conservative in expanding in oleochemicals. In the past three years, IOI has only acquired Cremer Oleo GmbH’s operations in Germany in 2015, which cost about €89.4mil.

• Hence, the other option is for IOI to return cash to its shareholders in the form of higher dividends. Based on IOI’s gross cash reserves of RM3.7bil, we think that IOI would be able to sustain a gross DPS of 16 sen each in the coming two years. These would only eat up 54% of the RM3.7bil reserves without accounting for any yearly increase in cash flows.

• The gross DPS of 16 sen in FY19F is the same as FY18E. In 9MFY18, IOI paid a gross DPS of 16 sen, which included the special dividend of 11 sen. The special dividend was paid following the disposal of Loders Croklaan, which was completed in March 2018. Recall that IOI sold Loders Croklaan for €275.5mil and US$595mil cash, to Bunge.

• Operationally, we have assumed that IOI’s FFB production would grow by a slower 4% in FY19F vs. 11% recorded in FY18. Production cost (cash cost) may rise from RM1,500/tonne in FY18E to RM1,550/tonne in Malaysia in FY19F dragged by higher wages, transportation and fertiliser costs. We have also assumed an average CPO price of RM2,450/tonne for IOI in FY19F compared with RM2,500/tonne in FY18E.

Source: AmInvest Research - 26 Jul 2018