IOI Corp has been actively looking for plantation estates to acquire, after its disposal of Loders to KBBV in September 2017. However, any acquisition in Malaysia could potentially come at a high price tag. Operationally, IOI Corp’s 9M FY19 earnings were affected by lower FFB production and CPO prices, but partially offset by a higher contribution from its resource-based manufacturing division. We expect earnings to improve in FY20-21E, on the back of improving CPO production and prices. We maintain our HOLD rating and TP of RM4.42 for IOI Corp.

Looking to Acquire More Plantation Estates

IOI Corp has been actively looking for plantation estates for acquisition, after selling its 70% equity interest in Loders to Koninklijke Bunge B.V (KBBV). Approximately RM1bn of the proceeds from the disposal has been earmarked for investment opportunities. However, there could potentially be a delay in any acquisitions, partly due to securing a suitable location and size while the high price tags of recent acquisition transactions by other plantation companies have been a deterrent.

CPO Prices Under Pressure in FY19

CPO prices in 9M FY19 were under pressure partly due to ample supply of other edible oils in the market, weak market sentiment as well as ongoing trade tensions between the US and China. We expect global palm-oil inventory to gradually fall with higher exports and higher consumption of palmoil products. Stronger exports and consumption will likely be supported by the energy market and food industries. We maintain our CPO ASP assumptions for IOI Corp at RM2,050-2,400/MT for FY19-21E.

Supported by Resource-based Manufacturing Division

The drop in IOI Corp’s 9MFY19 earnings was partially cushioned by higher contribution from its resource-based manufacturing division. We expect IOI Corp’s resource-based manufacturing division to continue to perform well given the strong demand for its oleochemical and refining products.

Maintain HOLD Rating and TP of RM4.42

We have made no changes to our earnings forecasts. We expect FY19E profit to be affected by lower margins due to weak CPO prices. We think earnings could potentially improve in FY20-21E, on the back of improving CPO production and prices. Our DCF-derived 12-month TP for IOI Corp is unchanged at RM4.42, and we maintain our HOLD rating.

Source: Affin Hwang Research - 27 Jun 2019