3QFY22 Core Net Profit (CNP) of RM357m (-24% QoQ, -18% YoY) came in slightly (4%) under our estimates but a little (3%) above consensus. 9M CNP came in about 70% of estimates. Nevertheless, earnings were good YoY thanks to higher palm product prices but weaker QoQ on weaker output compared to 2Q. Its 3Q (Jan-Mar) production was, like many peers, down QoQ though still up YoY. Looking ahead, CPO price should ease pending seasonally higher production but the price downside should be moderated by a tight global edible oils market. We are maintaining FY22E earnings but revising FY23E earnings slightly higher, by 7%, on palm oil prices staying higher for longer. We are keeping our MP and TP of RM4.65.

Within expectations: 3QFY22 Plantation profit hit RM416m (-20% QoQ, +160% YoY) on firmer CPO price of RM5,064 (+11% QoQ, +68% YoY) but lower FFB output of 0.600m MT, down by 22% QoQ though still up 9% YoY. Resource Based earnings of RM64m (-50% QoQ, -1% YoY) was weaker on lower volume and smaller contribution from associate Bunge Loders Croklaan. However, Indonesian plantation associate (Bumitama Agri) reported strong quarterly PATMI of IDR873b (approx. RM250m) (+35% QoQ, +424% YoY) thanks to palm oil prices as well as better than expected FFB harvest. No dividend was announced for 3QFY22. On a 9M basis, Core EPS of RM1.284bn (+80% YoY) was about 70% of our estimate.

Outlook: Supply of the world’s two leading vegetable oils, palm and soyabean, is expected to pick up seasonally in the 2H of CY22. This, along with Indonesian lifting of its temporary exports ban effective today, will weight down palm oil prices somewhat but several supportive factors are expected to keep prices firm for the rest of CY22 and possibly into CY23:

a) The worldwide edible oils and fats market is tight. Despite prospects of improving palm and soyabean oil supply in the 2H of CY22, meaningful replenishment of inventories is more likely in CY23.

b) Inventories of sizeable palm oil users such as China are believed to be low. Moreover, China has yet to fully reopen its economy and restart its post Covid-19 phase, so demand has yet to fully recover.

c) Current high oil and gas prices suggest that demand for biofuels would likely rise, helping to absorb supply and cushion any sharp fall in edible oils price.

We are keeping IOI’s CPO price of RM4,500 per MT for FY22 but revising up FY23 price from RM3,750 for FY23 to RM4,000. Aside from stronger Plantation earnings, decent Resource Based earnings are also expected as demand from economy reopening is likely to offset pending slowdown. Strong contribution is also due from Bumitama Agri thanks to its upstream oil palm operations. Financial-position wise, the Group has continued to improve. Net gearing declined from 28% in 2Q to 26% in 3Q with net debt of RM2.753b, down 2% compared to a year ago. We expect IOI’s net gearing to ease further on the back of strong operating cashflows thanks to buoyant palm oil prices.

Maintain MARKET PERFORM and TP of RM4.65. Although IOI trades at a premium PER and DY valuation to integrated peers with slower EPS growth and derives sizeable income from associates and JV, the Group does offer defensive qualities such as: (a) strong agri-land backed balance sheet, (b) good ESG record, (c) being one of the beneficiaries of food inflation as edible oils and fats prices have risen substantially compared to a year ago, and (d) second highest ESG rating of 81%, while M&A driven growth cannot be ruled out. The RM4.65m TP is based on blended FY22-23 CEPS (IOI is June FYE) at broader market PER of 17-18x.

Source: Kenanga Research - 23 May 2022