KEY INVESTMENT HIGHLIGHTS

• 4QFY20 normalised earnings rebounded to RM275.6m due to favourable CPO price and higher FFB production
• Full year FY20 normalised earnings of RM755.1m (+8.9%yoy) came in better than our expectation
• Future earnings growth to be partially dampened by the resource-based manufacturing segment
• Annual dividend maintain at 8sen for FY20 which translate into dividend yield of approximately two percent
• Upgrade to NEUTRAL with a revised TP of RM4.09

Strong 4QFY20 earnings recovery. IOI Corporation Bhd’s (IOI) 4QFY20 normalised earnings came in at RM275.6m, a significant increase of +79.5%yoy. The improvement in earnings mainly stemmed from higher contribution from the plantation segment. This was in view of favourable CPO and PK prices of RM2,370/mt and RM1,349/mt as well as higher FFB production of 865.5k MT (+7.6%yoy). Cumulatively, IOI’s FY20 normalised earnings amounted to RM755.1m (+8.9%yoy) which has exceeded our expectations by a variance of more than ten percent.

Plantation. FY20 segment profit improved by +45.0%yoy to RM701.5m. This was mainly supported by higher CPO price and better oil extraction rate (OER). For full year FY20, the average CPO price came in at RM2,314/mt (+14.3%yoy). Nonetheless, this was partially subdued by lower FFB production for the year of 3.1m MT (-8.9%yoy) due to aggressive replanting and also the delayed effects of the long dry spells in 2018 and 2019.

Resource-based manufacturing. The resource-based manufacturing segment FY20 underlying profit came in at RM381.3m, a decline of - 27.3%yoy. This was mainly due to lower operation contributions from the oleochemical and refining sub-segments with reduction in margins.

Dividend. The group announced 4QFY20 dividend of 4sen. This led to full year FY20 dividend of 20sen which is the same quantum distributed in FY29.

Impact to earnings. We are revising upward our OER and FFB assumptions to better reflect the group’s performance thus far. As a result, FY21 and FY22 earnings estimates has been revised upwards by +2.0% and +1.6% to RM802.0m and RM887.7m respectively.

Target Price. We roll forward our valuation base year to FY22 and derive a new target price of RM4.09 (previously RM3.58). This is premised on pegging revised FY21 EPS of 14.3sen against unchanged forward PER of 28.6x which is the two year historical average PER.

Source: MIDF Research - 26 Aug 2020