1HFY23 results exceeded expectations, once again. Its upstream segment weakened YoY but downstream segment surprised on the upside. However, margin compression is expected moving ahead. We raise our FY23F net profit by 8% to reflect the strength of the first half results. We lift our TP by 5% to RM4.20 (from RM4.00) but maintain our MARKET PERFORM call.

Stellar 1HFY23. 1HFY23 core net profit came in at 68% and 71% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from strong performance at the downstream segment.

Upstream plantation profit weakened 33% YoY in 1HFY23 largely on rising cost as CPO price was essentially flat whilst FFB production picked up 16% QoQ on easing labour shortages in 2QFY23. Fortunately, downstream earnings continue to stay robust. 2QFY23 resource-based manufacturing profit rose 98% YoY but was weaker QoQ because of a strong comparative base. IOI ended Dec 2022 with sharply lower net debt of RM1.4b (13% net gearing), down from end Sept 2022 level of RM2.2b (21% net gearing). A 6.0 sen interim NDPS was thus announced (same amount as in 1HFY22).

Softer quarterly earnings ahead. Palm oil prices have corrected sharply since mid-CY22 on the back of improving edible oil supply. However, CY23 supply-demand balance remains fragile as demand is expected to recover after stagnating since CY20. Moreover, post Covid recovery demand in CY22 was muted as high prices kept buyers at bay while China, the biggest edible oil market, is only just reverting to a new post Covid normal. Demand for biofuels is supportive as Indonesia raised palm-based biodiesel blend from B30 to B35 in Feb. while Brazil is considering increasing the current B10 soy-based biodiesel to B13/15 from April onwards. Altogether, we expect CPO prices to stay firm, and nudge up IOI’s FY23F CPO price from RM4,000 to RM4,100 but keeping FY24 price at RM3,500/MT pending a briefing on Friday.

Resource-based earnings are more susceptible to slower demand from economic headwinds and the group’s European downstream units are also enduring high energy costs Therefore, despite enjoying good margins, better pricing power (more specialty than commoditised products) with lower input palm oil prices, we expect weaker contributions ahead even if the contributions remain commendable.

We upgrade our FY23F net profit by 8% but maintain our FY24F numbers.

Maintain MARKET PERFORM but with a slightly higher TP of RM4.20 (from RM4.00) on FY23F CEPS at PER of 15x based on integrated peers’ rating plus a 5% ESG premium (see Page 3). Ongoing mechanisation and arrivals of more workers are set to improve future FFB production, hence helping to better contain cost as well as compensating for softness in CPO prices. However, downstream volume and margin are expected to ease on slower global economic growth. All in all, we like IOI for its land-backed NTA, low gearing and a good ESG rating of 4-star. The group’s upcoming wood palm project could also be a game changer as the plantation industry heads towards net zero waste.

Risks to our recommendation: (i) weather impact on edible oil supply, (ii) unfavourable commodity prices fluctuations, and (iii) production cost inflation.

Source: Kenanga Research - 1 Mar 2023