We came away from a management meeting with IOICORP turning more positive on its near-term prospects. FY21 FFB growth was guided at worst, flat (vs. negative-to-flat at best previously). This upside to our -3% estimate is the key positive takeaway. CPO price is seen at c.RM2,700/MT (until end of 2020) and production cost at RM1,500/MT (flat). We guesstimate 1QFY21 CNP (due end-Nov) at c.RM280-290m (+19-23% QoQ) on higher CPO price and FFB output. Raise FY21-22E CNP by 2-2%. Upgrade to OP (from MP) with higher TP of RM4.80 (from RM4.70) based on FY21E PER of 30x (-0.5SD).

Upside to FY21 FFB growth (vs. our expected -3%). Despite the group’s aggressive replanting target of c.12k Ha for FY21, management has guided FY21 FFB growth to be flat at worst (vs. previously guided at negative-to-flat at best), helped by favourable weather and rainfall. This entails considerable upside against our initial FY21 FFB growth expectation of -3%, which is a key positive takeaway. Note that 3MFY21 FFB output is up 10% YoY and production is expected to peak in October. As the group is still hunting for potential M&As, there could be further upside to FFB growth. Recall that the group has c.RM1b war chest earmarked for investments, with preference towards brownfield upstream plantation assets.

CPO price seen at c.RM2,700/MT until end of 2020. This is in line with our view that CPO price is likely to trend lower in the next few months. Our CY20- 21 CPO price forecast of RM2,500-2,600/MT remains unchanged. The group typically sells forward 2-3 months, following a strict risk policy and we understand that there is no intention to increase forward sales beyond its risk policy at the moment. Meanwhile, FY21 production cost was guided flat at c.RM1,500/MT (stable fertilizer cost).

Downstream outlook. Due to the COVID-19 pandemic, there has been a reduction in sales volume for its specialty fats division, especially in Europe and we expect this to continue as lockdowns return to the country. The group’s Oleochemical division is expected to remain relatively stable as higher demand from personal hygiene and pharmaceutical sectors (due to greater hygiene/precautionary measures) offset decline in other sectors. The group’s utilization rate for its oleochemical plants is at 77% (vs. our 80% estimate), while its refineries is at 65% (in line with our forecast).

Expecting a stronger 1QFY21. With higher average CPO price (MPOB: +22% QoQ) alongside higher FFB output (2% QoQ), we anticipate sequential earnings improvement. 1QFY21 CNP (due end-Nov) is guesstimated at c.RM280-290m (+19-23% QoQ). Overall, we expect FY21 to be a better year for the group as improvement in its upstream division overshadows the slight decline in its downstream segment.

Raise FY21-22E CNP by 2-2% on higher FFB growth of +4% and +1% (vs. -3% and +2% previously), but slightly weaker downstream. Note that we assume lower FY22E FFB growth on production normalization and the group’s continued aggressive replanting target of c.10k Ha in FY22.

Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher TP of RM4.80 (from RM4.70) based on an unchanged FY21E PER of 30x (-0.5SD). Currently, IOICORP is traded at FY21E PER of 25.5x, implying close to -2.0SD valuation which we think is attractive given its: (i) better-than-expected FFB growth potential, and (ii) integrated status which offers more earnings stability. Risks to our call are: (i) sharp decline in CPO prices, and (ii) a precipitous rise in labour/fertilizer/ transportation costs.

Source: Kenanga Research - 26 Oct 2020