IOICORP’s 2QFY22 Core Net Profit (CNP) of RM473m (+4% QoQ, +63% YoY) exceeded our expectation by 23% but came inline with consensus’ estimate, largely on strong CPO prices. The strong 2QFY22 helped lifted 1HFY22 CNP to RM927m (+71% YoY) which came in at 71% of our full-year CNP and 54% of consensus’. Firm 2QFY22 FFB output also contributed to the good performance, nudging up marginally QoQ and even YoY. 1HFY22 downstream earnings also improved YoY on healthier margins. Maintain MP but with higher TP of RM4.65 (from RM4.05) based on sector’s average CY22-23E PER of 16x. IOICORP typically enjoys superior ROEs to peers but growth is trailing over FY22-23 when compared to peers lik KLK which just expanded it upstream by 25-30% YoY.

An excellent 2QFY22: Underpinning the strong 2QFY22 results was strong upstream coupled with decent downstream performances:

a) Upstream enjoyed very good palm product prices in 2QFY22 with CPO averaging RM4,565 per MT (+13% QoQ, +53% YoY) and PK averaging RM3,678 (+44% QoQ, +86% YoY). 2QFY22 FFB output was also slightly firmer at 0.769k MT (+3% QoQ, +1% YoY) which further added to 2Q earnings strength. However, on a cumulative 1H basis, FFB production was down 8% YoY. Altogether, Plantation EBIT rose to RM522m in 2QFY22 (+28% QoQ, +71% YoY) and up by 72% YoY to RM930m for the 1H of FY22.

b) Downstream or Resource-based Manufacturing EBIT was mixed with EBIT of RM129m in 2QFY22 (-10% QoQ, +75% YoY). OoQ, 2QFY22 oleochemicals profit held up well but was slightly eroded by poorer refining margins. 1HFY22 EBIT was up 86% YoY to RM272m.

For 1HFY22, IOICORP declared an interim DPS of 6.0 sen, 33% better YoY compared to 1HFY21 interim DPS of 4.5 sen.

Positive CPO price outlook: Global edible oil & fats market ended 2021 with only slightly higher inventories compared to a year ago and had hoped for some early easing coming from good South American soyabean output. Although South American harvest is still ongoing, dry weather has led to disappointing production so far. Many are now downgrading earlier estimates by 5-10%. Meanwhile, labour shortfall is expected to hamper Malaysian palm production for much of 1H CY22 while Indonesian output is expected to nudge up only slowly. Nevertheless, edible oils & fats supply should improve come 2H CY22 from seasonally higher palm output as well as US soyabean harvest.

CPO prices are now likely to stay higher and longer than we had earlier anticipated. Therefore, IOICOP should see average CPO price of RM4,500/MT for FY22 instead of our estimate of RM3,400/MT previously and RM3,750/MT for FY23 vs. our old assumption of RM3,100/MT. FFB production is expected to be flattish over FY22-23 while production cost is heading up by as much as 15% YoY on rising input costs, notably fertiliser among others. Downstream segment’s margins may come under some pressure from higher feedstock prices but will likely to stay decent.The group may still consider M&As moving forward, with preference towards brownfield upstream plantation assets. All in all, we are revising up FY22E CNP from RM1,297m to RM1,823m largely on higher CPO price assumption.

Maintain MP but upgrading TP from RM4.05 to RM4.65 on 16x sector average CY22-23E PER. Our in-house ESG ranks IOICORP’ second in the sector with an 81% score. Key risk to our call is a sharp rise/fall in CPO price.

Source: Kenanga Research - 24 Feb 2022