IOI Corporation (IOI) 9M23’s PATAMI of RM1,077mn (YoY: -9%) came in within our and consensus estimates accounting 74% and 68% of full year forecast respectively. We are positive on IOI performance given its solid cash and cash equivalent position of RM1.92bn and a net gearing of 0.13x as at March 2023. However, it is important to note that there is a potential downside risk to earnings from the upstream segment, which accounts for approximately 63%-65% of the Group's profit. This concerns stem from possible further margins pressures due to lower average selling prices (ASP) of palm products and an increase in operating costs; added by margins squeeze from Resource-based Manufacturing segment (RBM) on higher electricity cost, export duty of CPO and stiff competition from other edible oils. Maintain a BUY call and unchanged TP of RM4.75.

• Within expectations. IOI’s 9M23 headline PATAMI was within our and consensus’ estimates. The difference between reported and core PATAMI are the fair value (FV) changes on biological assets, FV changes on derivatives financial instruments, gain on disposal of 10% equity interest of an associate and unrealized loss or gain on foreign exchange.

• QoQ. On a quarterly basis, lower profit of RM197mn (-72% QoQ) was due to a decline in contribution from all segments, owing to 1) lower ASP realised of CPO (-4.8% QoQ) and PK (-0.5% QoQ) to RM3,928/MT and RM2,153/MT respectively, 2) lower FFB production (3Q23: 628k MT; 2Q23: 773k MT), and 3) lower sales volume and margins from oleochemical and refining sub-segment in RBM segment.

• YoY/YTD. Lower profit recorded in 3Q23/9M23 (-52% YoY, -9% YTD) was due to a drop in contribution from Plantation segment (-55% YoY, -41% YTD) to RM227mn/RM914mn and share of profit from associate amounting to RM55mn/RM171mn (-35% YoY, - 10% YTD), mitigated by higher contribution from the RBM segment on account of higher contribution from the refining subsegment (Table 2). The decline in Plantation results was primarily attributed to higher cost of production and lower CPO and PK prices realised during the period.

• Outlook. We remain positive on IOI’s long-term prospects despite volatility in CPO price and stiff competition from other edible oils that may pose a challenge to its overall business. Its strategic positions in different segment of palm oil value chain (integrated player) comes with operational efficiency and hence, earnings resiliency.

• Our call. Maintain earnings forecast with a BUY call and unchanged TP of RM4.75 based on historical low 3-year average P/BV of 2.5x to FY23 BV/share of RM1.90. Our TP offers 21% upside potential from the current price.

Source: BIMB Securities Research - 31 May 2023