5-year Plan to Improve Productivity and Efficiency

• For the next 5 years, IOI plans to improve its productivity and efficiency through replanting with high-yielding planting materials and optimising the workforce, as well as growing its earnings contribution from the downstream and non-CPO segments.
• We believe the 5-year plan would be beneficial for the Group as it increases sustainability and competitiveness, and should help contribute positively to IOI Corp’s future earnings.
• We made no changes to our earnings forecasts for FY21-23E in this report, and we maintain our HOLD rating and 12-month TP of RM4.74.

Five Strategic Priorities for the Next 5 Years

IOI Corp embarked on a 5-year plan (2020-2024), starting Mar20, to provide a clear direction for the Group to progress from a cost-competitive palm-oil producer to a high value-added diversified palm-based products producer which will increase its resilience and competitiveness in the future. The 5-year plan is driven by five strategic priorities: 1) increase yield; 2) optimise workforce; 3) diversify crops; 4) increase non-CPO segment; and 5) grow oleochemical segment.

Earnings Likely to Improve

We expect IOI Corp’s earnings to improve going forward on the back of better contribution from both its upstream plantation and resource-based manufacturing divisions. The likely higher CPO prices in FY21 should help boost the upstream plantation division, and over time the improving yield and OER should increase the Group’s FFB and CPO production. As for the resource-based manufacturing division, we expect the oleochemical sub-segment to remain bright in FY21 despite some of the operational challenges caused by the on-going Covid-19 pandemic as the oleochemical products have a wide range of applications across different industries. We believe the stronger demand from the personal hygiene and pharmaceutical sectors would offset a drop in demand from the automotive and plastics sectors. For its refinery and commodity marketing sub-segment, the sales volume has increased since the start of FY21, according to IOI Corp.

Maintain HOLD Rating With An Unchanged DCF-derived TP of RM4.74

We make no changes to our FY21-23E earnings forecasts for IOI Corp. We maintain our HOLD rating on the stock given its strong quality, branding and reputation which lends support to its rich valuations.

Source: Affin Hwang Research - 3 Nov 2020