IOICORP’s FY23 results met expectations. FY23 earnings softened 16% YoY on lower commodity prices, partially cushioned by strong downstream performance. We are nudging up our FY24F net profit by 5% on firmer CPO price and easier cost but maintain our TP of RM3.80 (1.8x P/BV valuation) and MARKET PERFORM call.

FY23 core net profit met both our forecast and consensus estimate. The core net profit was adjusted for EIs of RM398m comprising: (i) RM310m of forex losses, (ii) RM105m of lower fair value, and (iii) RM17m in disposal gains. 4QFY23 CNP of RM236m was slightly firmer QoQ as CPO price per MT held well at RM3,906 (-1% QoQ, -26% YoY) and 32%-associate Bumitama Agri (BAL) earnings surged 77% QoQ even though still 42% lower than a year ago. Downstream contribution continued to ease and dipped sharply in 4QFY23 on poor demand and margins. Despite a challenging FY23, IOI still manage to lower net gearing, from 33% in June 2022 to 14% currently. However, the final dividend was trimmed from 8.0 sen a year ago to 5.0 sen, a reflection of a more cautious outlook.

Subdued forward upstream outlook likely. Improving edible oil supply has been dampening prices since mid-2022. However, overall supply-demand balance is fragile due to recovering demand, from strong post-COVID imports by China, growing exports to India and rising biodiesel offtake notably in USA. El Nino is now looking to set in and if severe can disrupt supply in 2024. Therefore, CPO prices should stay firm, and we are nudging up our forecast average CPO for IOI from RM3,700 to RM3,900 per MT for FY24. Meanwhile, cost is at historic high due to wage inflation and lacklustre palm kernel prices, which is sold to offset the cost of producing CPO. However, better field productivity (FFB yields), lower input costs (notably fertiliser) and energy (diesel) should ease costs somewhat moving forward.

Downstream headwind likely to continue. Underpinned by food and fuels, demand for CPO is often more stable whereas downstream market can be more sensitive to economic headwinds. Although IOI’s downstream focus on specialty and customised products attract better pricing and margins, the overall downstream contribution is likely to stay muted. Aside from softer demand, its European operations look set to face rising wages and energy pressures ahead.

Forecasts. We raise our FY24F net profit by 5% and introduce our FY25F numbers.

However, we keep our TP of RM3.80 which is based on 1.8x P/B plus a 5% premium to reflect a 4-star ESG rating as appraised by us (see page 3).

We continue to like IOI for its efforts in the followings: (i) improve planting materials, (ii) increase digitalisation, (iii) build infrastructures for greater mechanisation as well as (iv) converting oil palm trunks into net zero palm-based wood products. However, much of the fruit will only bear out in the medium to long term. Whilst earnings should improve over the next one to two quarters, subdue full-year earnings are still expected for FY24-25 on flattish CPO prices with some margin improvement from easier costs. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 23 Aug 2023