1HFY22 core net profit of RM986.3m (+81.8%) came in above expectations, accounting for 67.9-72.6% of our and consensus estimates, due mainly to better than-expected realised palm product prices and manufacturing earnings. Declared interim DPS of 6.0 sen (going ex on 9 Mar 2022). We raise our FY22-24 core net profit forecasts by 15.2%, 16.2% and 14.0%, respectively, mainly to account for higher CPO price and CPO production cost assumptions at plantation segment, and higher EBIT margin assumption at manufacturing segment. Post earnings revision, we maintain our BUY rating on IOI, with a higher TP of RM5.01 (from RM4.35 previously) based on 24x revised CY2023 core EPS of 20.9 sen.

Above expectations. 2QFY22 core net profit of RM532.2m (QOQ: +17.2%; YoY: +82.9%) took 1HFY22 sum to RM986.3m (+81.8%). The results came in above expectations, accounting for 67.9-72.6% of our and consensus estimates, due mainly to better-than-expected realised palm product prices and manufacturing earnings.

Exceptional items (EIs) in 1HFY22. Core net profit of RM986.3m in 1HFY22 was arrived after adjusting for (i) RM10.0m FV gain on biological assets, (ii) RM54.1m FV loss on derivative financial instruments, (iii) RM15.3m forex losses, (iv) RM5.3m FV gain on other investments, (v) RM70.8m FV loss on options, (vi) RM4.1m write-down, (vii) RM29.4m loss on repurchase of Guaranteed Notes, and (viii) RM55.3m share of Loder’s impairment loss.

Dividend. Declared interim DPS of 6.0 sen (going ex on 9 Mar 2022).

QoQ. Core net profit increased by 17.2% to RM532.2m in 2QFY22, as improved plantation earnings (arising from higher realised palm product prices and FFB output) and improved manufacturing earnings (post adjustment for RM55.3m share of Loder’s impairment loss). During 2QFY22, realised CPO and PK prices increased by 13.2- 44.2% to RM4,565/mt and RM3,678/mt).

YoY. Core net profit surged by 82.9% to RM532.2m, boosted by improved plantation earnings (arising from higher realised palm product prices and FFB output) and downstream segment.

YTD. Core net profit surged by 81.8% to RM986.3m in 1HFY22, boosted by improved plantation earnings (arising from higher realised palm product prices but partly weighed down by a 7.6% decline in FFB output) and improved manufacturing earnings (arising from margin expansion at oleochemical sub-segment). During 1HFY22, realised palm product prices increased by 54.7-80.4% (to RM4,305/mt for CPO and RM3,112/mt for PK).

Outlook. Management remains optimistic on its FY22 performance, supported by high palm product prices (which are expected to remain strong until at least 1H22, on the back of global edible oil supply tightness and improved global economy) and intensified mechanisation initiatives at its upstream segment, and improvement in operating performance of the specialty fats sub-segment. Manufacturing segment, on the other hand, will remain profitable, as significantly higher feedstock and freight costs will be cushioned by robust demand (in line with global economy recovery).

Forecast. We raise our FY22-24 core net profit forecasts by 15.2%, 16.2% and 14.0%, respectively, mainly to account for higher CPO price (RM4,300/mt for FY22 and RM3,800/mt for FY23 and RM3,300/mt for FY24, following our recent upward revision in CPO price assumptions for the sector) and CPO production cost assumptions at plantation segment, and higher EBIT margin assumption at manufacturing segment.

Maintain BUY with higher TP of RM5.01. Post earnings revision, we maintain our Buy rating on IOI, with a higher TP of RM5.01 (from RM4.35 previously) based on 24x revised CY23 core EPS of 20.9 sen.

Source: Hong Leong Investment Bank Research - 24 Feb 2022