IOICORP’s 1HFY24 results missed our forecast (on weak downstream earnings) but met market expectations. Softer 2Q CPO prices were mitigated by better FFB harvest while downstream operation inched up QoQ but was much weaker YoY. We cut our FY24-25F net profit forecasts by 13% and 4%, respectively, but maintain our TP of RM3.80 and MARKET PERFORM call.

Its 1HFY24 core net profit of RM602.7m (excluding RM46m fair value losses and RM9m forex gains) missed our expectation at only 42% of our full-year forecast but met market expectations at 46% of the fullyear consensus estimate. The variance against our forecast came largely from weaker-than-expected downstream earnings.

Its 1HFY124 core net profit fell 43% YoY largely due to a 76% drop in downstream manufacturing earnings as profit was unusually strong last year. Plantation earnings eased 4% YoY as weaker CPO price (-13% YoY) was mitigated by better FFB output (+8% YoY).

Its 2QFY24 core net profit of RM305m was also down sharply YoY but flat QoQ on slightly softer plantation profit of RM319m (-3% QoQ, -3% YoY) while downstream manufacturing earnings were mixed at RM85m (+47% QoQ, -82% YoY). Net gearing dipped QoQ from 15% (RM1.721b net debt) to 14% (RM1.6174b) as at 31 Dec 2023. An interim dividend of 4.5 sen was declared for 1HFY24, down from 6.0 sen a year ago but in line with our estimate; hence, full year DPS at 11.0 sen is maintained.

Upstream margins should improve slightly moving ahead as CPO prices look to stay range-bound while FFB yields improve and input cost eases. An average CPO price of RM3,800 per MT is still expected on the back of only modest global edible oil supply improvement while demand looks set to grow 3%-4% YoY. Supply growth is being hampered by flattish output for palm oil while Latin American soyabean crop was affected, initially by poor growing weather in Brazil while poor harvesting condition is now besetting Argentina. Nevertheless, CPO production cost looks set to ease as fertiliser and fuel prices have dipped 20%-40% YoY while FFB output has risen as Malaysian estates welcomed back guest workers. Nonetheless, cost of labour is expected to continue creeping up due to new shorter working hour ruling, and pending new union agreement.

Resource-based manufacturing headwind should abate but more likely beyond FY24. IOI’s downstream focuses more on specialty and customised products which command better pricing and margins but the operations are not immune to intense competition and demand headwinds, which its refining operation is currently enduring. Its European operations are also facing weak demand, rising wages and energy supply pressures but margins are better still highly able to absorb the headwinds. All in all, the guidance is for meaningful improvement in downstream manufacturing only after FY24.

Forecasts. We cut our FY24-25F net profit forecasts by 13% and 4%, respectively, to reflect a softer upstream outlook.

Valuations. However, we maintain our TP of RM3.80 based on 2.0x PBV, in-line with the average PBV for large integrated planters, plus a 5% premium to reflect a 4-star ESG rating as appraised by us (see page 3).

Investment case. We like IOICORP for its use of higher yielding planting materials, pro-active adoption of mechanisation and digitalisation to improve productivity, converting oil palm trunks into net zero palm-based wood products as well as higher value downstream focus. However, much of the fruits will only bear out in the medium to long term. Whilst earnings should improve over the next one to two quarters, subdued 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 call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues; (ii) impact of weather and labour shortages on production, (iii) weak CPO and palm kernel prices, and (iv) cost inflation particularly fertilizers.

Source: Kenanga Research - 26 Feb 2024