We came away from a meeting with the IR of IOICORP feeling NEUTRAL on its near-termprospects.FY21 FFB growthwasguidedat 3-5% (vs. our +5%) with FY21 production cost to remain between RM1,500-1,600/MT (higher replanting cost offsets higher FFB), while CY20 CPO price is seen at RM2,300-2,400/MT. 4QFY20 downstream division seen to improve sequentially on: (i) higher sales volume, and (ii) margin improvements. However, lower CPO price (-15% QoQ) should offset the recovery in FFB output (+37% QoQ) for its upstream division. Fairly valued at current price (FY21E PER of 29.5x). Maintain MARKET PERFORM with unchanged TP of RM4.25.

FY21 FFB growth guided at 3-5% (vs. our expected +5%). The low single-digit growth is due to its aggressive replanting exercise plan (FY21E - 12k ha vs. FY20 – c.8k ha) mainly in its Sabah estates, which we believe account for c.62- 63% of the group’s production. Growth is expected to be driven by Peninsular estates (c.25% of production) recovering from the dry weather impact, and Indonesian estates (c.10% of production) with young age profile of 5 years. Meanwhile, based on its Bursa announcements, FY20 FFB output registered a c.10% YoY decline.

FY20 production cost expected to creep up to c.RM1,500-1,600/MT (from c.RM1,450/MT in FY19) due to lower FFB output (-10% YoY), while FY21 production cost should remain steady (also RM1,500-1,600/MT) as higher replanting cost is negated by improvement in FFB output. We believe the group has locked in >50% fertilizer requirements for FY21 at a level similar to FY20. CY20 CPO price on the other hand, is seen at RM2,300-RM2,400/MT, in line with our forecast.

What to expect in 4QFY20? The group is expected to release its 4QFY20 results on 17 August 2020. Downstream segment should improve sequentially from: (i) higher sales volume (backloaded MCO and China demand), and (ii) margin improvements. In-line with heightened personal hygiene measures due to COVID-19, we believe sales volume for soap noodles and glycerin (which are used in toiletries and hand sanitizers manufacturing) were higher in 4QFY20, while lower feedstock prices from lower CPO prices (4QFY20 MPOB: -15% QoQ) should have resulted in margin improvements. For its upstream division, lower CPO prices should offset the recovery in FFB output. Based on its Bursa announcements, the group’s 4QFY20 FFB output spiked 37% QoQ.

RM1b of firepower for acquisitions. The group has c.RM960m war chest (from the disposal of 70% equity interest in Loders) for acquisitions and remains on the lookout for brownfield plantation estates - with preference towards Malaysian estates. However, attractive deals are difficult to come by as most estate owners are demanding lofty valuations. That said, with an extended deadline (Sept 2021) for the utilization of the proceeds, we believe there is a possibility for a deal to manifest in FY21. Meanwhile, the group has allocated RM500m for FY21 capex (Downstream: RM200m), and earmarked 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 as the completion is projected to be only in mid-FY22.

No changes in FY20-21E CNP of RM847-958m as updates are consistent with expectations.

Maintain MARKET PERFORM with an unchanged Target Price of RM4.25

based on FY21E PER of 28x, implying close to -1.0 SD from mean. While FY21 should spell out a better year for IOICORP from higher FFB growth of 3-5% (vs. FY20: -10% YoY), and downstream demand recovery (post-pandemic), we think valuations are not at an attractive level. At current price level, the group appears fully valued at FY21E PER of 29.5x. Note that inventory levels are expected to rise in the coming months as production enters peak season, which should exert pressure on CPO prices.

Source: Kenanga Research - 21 Jul 2020