• We are positive on IOI given its solid cash and cash equivalent position of RM2.38b with a net gearing at 0.26x as at March 2022. Its cash cow is still from the upstream segment which contributes about 63%-65% of profit to the group.

• As upstream business is highly exposed to PO price movement, the manufacturing segment which makes up c. 35% of group profit will help cushion any pullback of ASP for CPO – hence, reducing earnings volatility.

• Reaffirm a BUY recommendation with a TP of RM4.75 based on hist. avg. 3 years P/B of 2.5x and BV/share of RM1.90, which in our view, is more reflective of its potential, and our current and future expectation.

• The stock is attractive given its valuation that is below hist. 5-yrs avg. forward PE of 25.9x. It is also trading near 1-SD below mean (5 years) of 14.2x.

9M22 Performance in Retrospect

IOI’s 9MFY22 revenue and core profit increased by 52% and 29% respectively to RM11.8b and RM1.28b thanks to higher CPO and PK price realized despite being hit by lower production. This was further aided by higher share of associate from Bumitama. Conversely, higher profit contribution from Resource-based Manufacturing (RBM) segment was due to higher contribution from the oleochemical sub-segment amid improvement in margins that was offset by lower sales volume from the refining sub-segment and lower share of associate from Loders. Of note, heavy rain and flood incident in crop growing areas, and labour shortage have disrupted crops production in Peninsular and Sabah during the period.

Earnings Outlook Remains Promising

We foresee IOI to maintain record earnings, estimated to grow at 3-years CAGR of 34% on the back of a 20% increase in revenue; to be supported by improvement in FFB production and sales volume, and higher palm products price. We estimate IOI’s FFB production to improve by 4% to 2.9m tonnes in FY23 from 2.8m tonnes estimates in FY22. Nonetheless, FFB yield may soften to 20.45 t/ha from 20.78 t/ha in FY21, in view of younger oil palm trees in Indonesia of circa 7-8 yrs. (Group: 13.5 yrs) as well as prolonged labour shortage issue in Malaysia and aggressive replanting activities.

In view of strong CPO price movement in Q2 2022, we expect plantation and refining margins to improve in 4Q22 to be driven by a seasonally higher production and stronger sales volumes following Indonesia exports ban of palm oil from 28 Apr to 23 May 22. Given the Group’s upstream business is highly exposed to the strength of CPO price, the manufacturing segment will play a key role in helping cushion any slack or reduction in average selling price (ASP) of CPO, (contributing circa 35% of Group profit) hence, reducing massive earnings volatility, if any. Although we are heading towards an expected moderation in CPO price in 2H22, we believe the overall pullback could be less severe than in previous cycles, driven by structural changes in plantation sector. Nonetheless, we are cautious on the possibility of forex translation risks on its debt amounting c. USD966m given upside risks to Dollar in the foreseeable future.

BUY at new TP of RM4.75

Maintain our BUY call on IOI with a new TP of RM4.75 from RM5.00 previously, based on P/B of 2.5x (historical low 3-yrs avg.) and BV/share of RM1.90 as we roll our valuation and applying a lower historical 3-yrs avg. P/B after assuming CPO prices that may have peaked in 1Q22 and may moderate in 3Q22. Our TP offers a 16.4% upside potential from the current market price.

Source: BIMB Securities Research - 1 Jul 2022