Highlights from IOI’s virtual post-results briefing include (i) FFB output to resume on uptrend in FY23, (ii) CPO production cost to inch up in FY23 on higher fertiliser prices and application (but partly offset by FFB production growth), (iii) near term CPO price to remain well supported at RM4,000/mt level, (iv) manufacturing segment to face several near-term challenges, but these will be partly mitigated by new capacities, and (v) strengthening balance sheet and absence of M&A opportunities indicate possibility of higher dividend payout ratio in future. Maintain earnings forecasts, TP of RM4.65 (based on 22x CY24 core EPS of 22.1 sen) and BUY rating.

Below Are Key Takeaways From IOI’s Post-results Briefing:

FY23 FFB output to improve on improved labour situation. FFB output fell by 6.6% to 2.7m tonnes in FY22, dragged mainly by labour shortfall. Management is hopeful that FFB output will resume on uptrend in FY23 (with 5-10% growth, depending on the timing of foreign labour arrival), as it anticipate the gradual arrival of foreign labour (since recently) to ease labour shortage.

CPO production cost to inch up in FY23. Management expects CPO production cost to increase by ~5% to RM2,100/mt in FY23, as higher fertiliser prices (blended prices have gone up by 25-30% YoY) and higher fertiliser application programme will be partly mitigated by an anticipated recovery in FFB production.

Forward sales. Management shared that it has locked in some forward sales for the next months at higher prices (while volume was undisclosed), indicating that IOI will be clocking in higher-than-average realised CPO price in 1QFY23.

Near term CPO price to remain well supported at RM4,000/mt level. Management believes that CPO price will remain well supported at RM4,000/mt level in the next few months, given supply constraints and its price competitiveness against other competing edible oils (in particular, soybean oil).

Manufacturing segment: near-term challenges to be partly mitigated by new capacities. Despite an 11-16% decline in oleochemical and refinery sales volume (due mainly to competition from Indonesia), core PBIT at manufacturing segment surged by 80% to RM498.5m in FY22, thanks to margin expansion and hedging strategy. Moving into FY23, we gather that performance at the manufacturing segment will likely weaken from FY22, given the (i) exceptional margins registered at refinery sub-segment during FY22 will unlikely sustain into FY23 amidst price volatility, and (ii) challenging operating environment within the oleochemical sub-segment (given China’s zero Covid policy and energy crisis in EU). These will, however, be partly mitigated by its new fatty acid and soap noodles plants (which are expected to commence operations by Sept-22).

Balance sheet to strengthen further post BLC stake reduction. IOI’s net debt and net gearing stood at RM2.4bn and 0.22x as at 30 Jun 2022. The recent stake reduction in Bunge Loders Croklaan Group (BLC, which is expected to result in a disposal proceed of RM466m) will bring down its net gearing further (to <0.2x, based on our estimates). Given its improving balance sheet and absence of M&A potentials (at least in the near term), IOI will likely increase its dividend payout ratio in the future.

Forecast. Maintain, guidance are in line with our projection.

Maintain BUY with unchanged TP of RM4.65. We maintain our BUY rating on IOI, with an unchanged TP of RM4.65 (based on unchanged 22x CY24 core EPS of 21.1 sen.

Source: Hong Leong Investment Bank Research - 26 Aug 2022