FY22 Core Net Profit (CNP) of RM1,804m (+68% YoY) came in line with our and market expectations. Overall earnings were robust thanks to higher palm product prices despite a 7% YoY drop in output. 4QFY22 CNP performed well, also on firmer CPO price which has eased somewhat since. We are adjusting up FY23F Core EPS (CEPS) marginally and introducing FY24F earnings. Maintain MARKET PERFORM but lowering TP from RM4.65 to RM4.10 as we adopt FY23F CEPS across the sector.

4QFY22 Plantation profit was robust, coming in at RM404m (-3% QoQ, +8% YoY), helping to lift overall FY22 Plantation profit by 63% YoY to RM1,750m. CPO price was firmer in 4QFY22, averaging RM5,260/MT (+4% QoQ,% +44% YoY) but FFB output was disappointing. Weak 4QFY22 harvest of 0.611m MT (+2% QoQ, -16% YoY) dragged FY22 production down by 7% YoY to 2.727m MT. However, 4QFY22 Resource Based profit of RM163m (+155% QoQ, +148% YoY) saw weaker volume but much better refining margins, hence the stronger overall performance. Overall, FY22 earning from the division rose 80% YoY to reach RM499m thanks to better refining as well as oleochemical margins. Its 32% associate, Bumitama Agri, reported another strong quarter with IDR873b (RM250m) (+35% QoQ, +424% YoY) in PATMI thanks to robust palm oil prices and good FFB production. IOI announced a final NDPS of 8.0 sen bringing full-year NDPS to 14.0 sen for FY22, slightly better than our expectation of 13.0 sen.

Since June, CPO prices have dropped sharply, partly due to seasonal supply uptrend, and partly due to aggressive selling by Indonesia as storage for more oil became scarce while demand recovery has also remained slow. However, the pending improvement in supply is not likely to fully address the current edible oils tightness. We expected the ongoing tightness to ease only in 2023, possibly even later if demand recovers stronger and faster than the 3-4% expected. As such, we expect CPO prices to hover around RM4,000/MT into 2023 on the back of: (a) global edible oils supply recovery staying fragile, (b) improving demand as the world progresses towards a new post Covid normal, and (c) elevated fossil fuel prices which in turn are stimulating latent demand for biofuel.

We are keeping IOI’s CPO price of RM4,000/MT for FY23F and introducing FY24F earnings at CPO price of RM3,800/MT. Plantation earnings should ease in light of the weaker CPO prices but to still stay healthy. Although a slowing economic outlook may curb some demand, we expect palm oil demand to stay firm in light of its competitive prices compared to other alternative edible oils and fats. Decent Resource Based earnings are also expected as IOI has expanded the operations as well as it benefitting from lower raw material. Lower contribution is expected from Bumitama Agri but decent yields from its palm trees in favourable age group should help mitigate the full impact of weaker CPO prices.

The Group’s financial position improved QoQ with net gearing declining from 26% in 3Q to 23% in 4QFY22. Net debt decreased by 10% QoQ, from RM2.75b in 3Q to RM2.49b. Net gearing should decline further on the back of healthy operating cash flows, thanks to buoyant CPO prices.

Maintain MARKET PERFORM but downgrading TP from RM4.65 to RM4.10. Although IOI trades at slight premium to other integrated peers and derives sizeable income from associates and JV, the Group does offer defensive qualities such as: (a) strong agri-land backed balance sheet, (b) decent gearing, and (c) good ESG rating of 4-star. Growth from M&A cannot be ruled out as expressed by the group. Our TP of RM4.10 is based on FY23F CEPS at PER of 15x based on integrated peers’ rating plus a 5% ESG premium.

Source: Kenanga Research - 24 Aug 2022