IOICORP’s 1HFY21 CNP of RM542.4m (+24% YoY) is deemed above our/consensus’ expectations at 54%/55%, but FFB output (1.64m MT; +2% YoY) is below at 51%. We expect 2HFY21 upstream earnings to remain strong on higher CPO prices. Raise FY21-22E CNP by 8% each. Maintain OUTPERFORM with an unchanged TP of RM4.95 based on rolled-over FY22E PER of 27x (-0.5SD). Currently the group is traded at an attractive FY22E PER of 23.1x (below -1.5SD), akin to valuation levels of small/mid cap upstream planters.

Deemed above expectations. IOI Corporation (IOICORP) registered 2QFY21 Core Net Profit (CNP) of RM290.9m (+16% QoQ; +26% YoY), which brought 1HFY21 CNP to RM542.4m (+24% YoY), which we deem above our/consensus’ expectations at 54%/55%, in view of higher 2HFY21 CPO prices. However, 1HFY21 FFB output of 1.64m MT (+2% YoY) is below our expectation at 51% (vs. 5-year average of 55%). DPS of 4.5 sen is as expected.

Upstream in the limelight. YoY, 1HFY21 CNP rose (+24%) lifted by higher average CPO price (+31%) and FFB output (+2%). As a result, plantation segmental operating profit leapt (+108%) which overshadowed the decline (- 23%) in downstream earnings from higher feedstock price and weaker performance in Europe and Asia. QoQ, despite a 13% decline in FFB output, 2QFY21 CNP improved (+16%), due to higher CPO price (+16%) which resulted in 29% improvement in plantation segmental operating profit.

The spotlight is still on high CPO price. Typically, its 2HFY21 production is seasonally weaker, as reflected in 2HFY21 earnings. While we anticipate a similar production trend in 2HFY21, it may not be the case for earnings. Premised on higher CPO price (QTD 3QFY21: +13% QoQ) so far, we expect earnings in 2HFY21 to remain strong. Meanwhile, the group is still hunting for potential M&As with a c.RM1b war chest earmarked for investments, with preference towards brownfield upstream plantation assets.

Raise FY21-22E earnings by 8% on higher FY21-22E CPO price of c.RM2,900- 2,950/MT, but reduce FY21-22E FFB growth (from 4-2%) to flat and 2%. respectively.

Maintain OUTPERFORM with an unchanged TP of RM4.95 based ona rolled over FY22E PER of 27x (from 30x), reflecting -0.5SD from mean. Currently, IOICORP is traded at FY22E PER of 23.1x, implying below -1.5SD valuation. We think this is unjustified and the company should trade at a minimum of -0.5SD valuation given: (i) higher CPO price environment, (ii) its integrated operations partially shielding the group from volatility of CPO price, and (iii) its FBM KLCI status. Risks to our call are: sharp rise/fall in CPO prices and a precipitous increase/decline in fertiliser/labour/transportation costs.

Source: Kenanga Research - 24 Feb 2021