We came away from a management meeting reassured about IOICORP’s prospects. 2QFY20 earnings are expected to improve sequentially (Upstream: higher CPO prices; Downstream: low feedstock prices). Management guided FY20 FFB growth of 2-3%, but we are sticking to our -2% in anticipation of a seasonal decline in 2HFY20. Nonetheless, higher CPO price (5MFY20: +7% YoY) overshadows lower production, spelling out a better FY20. No changes to earnings estimate. Maintain MARKET PERFORM with unchanged TP of RM4.45.

Expecting sequential earnings improvement in 2QFY20. We believe 2QFY20 should capture a portion of the CPO rally (Our estimate: c.RM2,300/MT) due to forward sales (typically 1-month ahead), while the full impact should be seen in 3QFY20. For its downstream division, 2QFY20 margins should remain stable on lower feedstock prices, while slight margin compression is expected starting from 3QFY20, should CPO prices remain at current level. Nevertheless, higher CPO price bodes well for IOICORP as the potential upstream margin expansion overshadows the potential downstream margin compression. Furthermore, management expects improvement in its 30%-owned specialty fats associate Bunge Loders, targeting contribution of RM50- 60m (vs. FY19: RM45m) on the back of wider customer base and better product mix arising from synergies with the larger Bunge group.

Guiding FY20 FFB growth of 2-3% (vs. our expected -2%) on aggressive replanting exercise (6% of matured area vs. the typical 3- 4%). Our expected 2% decline in FY20 FFB output stems from our view of a seasonal decline in 2HFY20. 5-year historical check reveals 1HFY FFB makes up on average 55% of full-year, while based on managements’ FY20 FFB growth of 2-3%, 5MFY20 FFB output only made up 39%. Additionally, the aggressive replanting effort (mostly for past prime age palms in Sabah estates), will result in a loss of c.3-4k Ha of the group’s matured hectarage (net of new Kalimantan areas coming into maturity) and should also lead to CPO production cost creeping up to c.RM1,500/MT. Nonetheless, FY20 should spell out a better year for the group as higher CPO price (5MFY20: +7% YoY) masks lower production and heightened cost of production. Moreover, management appears comfortable with a fundamental CPO price of RM2,500-RM2,600/MT.

Plans for new oleochemical plant in Penang on track. The group has allocated RM500m for FY20E CAPEX (Downstream: RM200m), earmarking c.RM100m for further capacity expansion in Prai, Penang. The new facility is expected to increase the group’s existing Oleochemical capacity by 110k MT/year (vs. 780k MT currently). However, we have yet to factor in any earnings contribution from this as the completion is estimated only in FY22. Meanwhile, the group remains on the lookout for brownfield plantation estates, but management notes that attractive deals are difficult to come by as most estate owners are demanding lofty valuations. As such, the group is likely to seek (from its shareholders) an extension (1 year) to the initial deadline of March 2020 for the utilization of c.RM960m (from the disposal of 70% equity interest in Loders).

No changes in FY20-21E CNP of RM947m-1.07b as updates ere consistent with expectations. We highlight here that our FY20-21E CNP are 7-9% higher than consensus which appears conservative.

Maintain MARKET PERFORM with an unchanged Target Price of RM4.45 based on CY20E PER of 27.7x, implying mean. While FY20 should spell out a better year for IOICORP from stronger upstream and solid downstream, at current price level, the group appears fully valued at CY20 PER of 28.3x.

Source: Kenanga Research - 17 Dec 2019