During our recent small group virtual meeting with IOI, we gather that (i) management is guiding flattish to slight negative FFB output growth in FY22, on the back of persisting labour shortfall; (ii) to mitigate the labour shortage, IOI has accelerated its mechanisation programme; (iii) IOI has locked in its 2HFY22 fertiliser requirement (which blended price has increased by ~10% yoy), and this will result its CPO production cost going up by ~3-4% in FY22, (iv) replanting activities will decline further to ~5,000 ha in FY22 (from ~7,000 ha guided earlier), amidst high CPO price environment and labour shortage, and (v) downstream segment will remain profitable in the near term. We maintain our earnings forecasts, TP of RM4.35 (based on unchanged 24x CY2023 EPS of 18.1 sen) and BUY rating on IOI.

Flattish to slight negative FFB output growth in FY22. IOI’s FFB output fell by 7.6% to 1.52m tonnes in 1HFY22, dragged mainly by aggravating labour shortfall (which shortfall has worsened to 15-20% from 9-15% a few months ago). For the full year, management is guiding a flattish to slight negative FFB output growth, on the back of persisting labour shortfall.

Stepping up mechanisation efforts. To mitigate the labour shortage, IOI has accelerated its mechanisation programme (which includes, amongst others, mechanising its fertilising and pesticide spraying, as well as automating mill operations), which will reduce its dependency on labour by 25% over the longer term.

2HFY22 fertiliser requirement locked in. We understand that IOI has locked in its 2HFY22 fertiliser requirement (which blended price has increased by ~10% YoY), and this will result its CPO production cost going up by ~3-4% in FY22 (from ~RM1,500/mt in FY21). We understand that IOI is in the midst of securing its 1HFY23 fertiliser supply, which blended price is expected to rise by >30% (vs. its FY22 blended price).

Lower replanting target in FY22. IOI’s replanting activities declined to ~7,000 ha in FY21 (from ~10,000 ha in FY20), due partly to movement controls arising from Covid - 19 pandemic. We gathered that replanting activities will decline further to ~5,000 ha in FY22 (from ~7,000 ha guided earlier), amidst high CPO price environment and labour shortage.

Downstream will remain profitable, at least in the near term. We understand that IOI’s downstream segment will remain profitable in the near term, as higher feedstock and freight costs will be mitigated by its relentless effort to improve cost efficiency and productivity, and growth in specialty business.

Minimal impact from Prosperity Tax. Management sees minimum impact from the implementation of Prosperity Tax (Cukai Makmur), as its upstream operations (the main earning contributor to IOI, which accounted for >90% of IOI’s PBIT in 1QFY22) is split over >30 subsidiaries.

Forecast. Maintain for now, pending release of 2QFY22 financial performance on 23 Feb 2022. Based on our estimates, every RM100/mt increase in our CPO price assumption will lift our FY22-23 core earnings forecasts by 3-4%.

Maintain BUY with unchanged TP of RM4.35. We maintain our BUY rating on IOI, with unchanged TP of RM4.35 based on unchanged 24x CY2023 EPS of 18.1 sen. We like IOI for its decent share liquidity, strong balance sheet (with net gearing of 0.25x as at 30 Sep 2021), and decent valuation. At RM3.93, IOI is trading at FY22-24 P/E of 17.0x, 20.9x and 22.5x, respectively.

Source: Hong Leong Investment Bank Research - 25 Jan 2022