KEY INVESTMENT HIGHLIGHTS

• 1QFY21 normalised earnings increased to RM251.5m due to favourable CPO and PK prices and higher FFB production

• This came in within ours and consensus expectations

• Optimism in the plantation segment to be capped by stagnant FFB production

• Resource-based manufacturing segment remains a concern due to higher input cost and Covid-19 pandemic

• Maintain NEUTRAL with an unchanged TP of RM4.52

Strong 1QFY21 earnings performance. IOI Corporation Bhd’s (IOI) 1QFY21 normalised earnings came in at RM251.5m, an increase of +36.3%yoy. The improvement in earnings mainly stemmed from higher contribution from the plantation segment. However, this was partially offset by the lower contribution from the resource-based manufacturing segment. All in, IOI’s 1QFY21 financial performance came in within ours and consensus expectations, accounting for 27.4% and 27.6% of full year FY21 earnings estimates respectively.

Plantation. The segment profit improved by +116.0%yoy to RM273.6m. This was in view of favourable CPO and PK prices of RM2,579/mt (+28.1%yoy) and RM1,486/mt (+32.0%yoy) as well as higher FFB production of 878.7k MT (+9.6%yoy).

Resource-based manufacturing. The resource-based manufacturing segment 1QFY21 underlying profit came in at RM89.4m, a decline of - 256.6%yoy. This was mainly due to lower operation contributions from the oleochemical and refining sub-segments with lower margins. In addition, the performance of its associates, Bunge Loders Croklaan Group B.V. is also impacted by the Covid-19 pandemic.

Target Price. We are maintaining our target price of RM4.52. This is premised on pegging revised FY22 EPS of 15.8sen against unchanged forward PER of 28.6x which is the two year historical average PER.

Maintain NEUTRAL. We expect FY21 FFB production to trend at similar level as compared to FY20. This would limit the positivity stemming from the favourable CPO price. Meanwhile, the on-going effort to mechanise its estates and digitize its business process would at the very least help to keep the operating cost at bay. However, we remain concern with the performance of the resource-based manufacturing in view of the declining in sale volume and contraction in profit margin which was brought about by the higher input cost and Covid-19 pandemic. This would further affect the earnings capability of the group. Meanwhile, we view that IOI’s current valuation of more than 30x is rather stretched as earnings growth potential will be capped by the stagnant FFB production. As such, we do not foresee any upside in the near term. All factors considered, we are maintaining our NEUTRAL recommendation.

Source: MIDF Research - 17 Nov 2020