• Upgrade to BUY from Neutral, new SOP-based TP of MYR4.70 from MYR4.60, c.14% upside with c.4.5% FY22F yield. Given our expectation of volatile CPO prices, we believe IOI should perform better, due to its integrated business model. With its share price having retreated, valuations look more attractive now – the stock is trading at 14.6x FY23F P/E, more than 2SD below its historical mean of 23x.

• CPO prices have plunged on the back of the unwinding impact of Indonesia’s export ban, as well as fears of recession, which brought down commodity prices in general. We believe the price decline could have been slightly overdone, having fallen 44% in seven weeks – much more than the declines in soybean (-31%), crude oil (-17%) and wheat (-16%). While regulatory risks remain – particularly for Indonesian plantations – supply concerns will continue to haunt the sector for the rest of 2022, given the logistics backlog in Indonesia and labour shortages in Malaysia. That said, if these issues are resolved by end-2022, and if Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should still be a better year for supply, and prices should remain under pressure.

• ESG concerns, while still around, seem to have taken a back seat. However, the ESG discounts we had previously assigned to valuations are still prevalent. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvements. From our analysis, we highlight that while better disclosure on ESG-related information has been made over the years, progress in mitigating such issues is rather slow. As a result, we lift our ESG scores for some companies that have made progress, but note that some remain relatively stagnant in their ESG efforts, and others have even reduced disclosures.

• CPO price assumptions revised down. We still expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, thereby providing support to CPO prices. We cut our 2022F CPO price to MYR5,100/tonne (from MYR5,300/tonne). For 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could decrease further. However, support from higher biodiesel mandates and discretionary biodiesel demand coming back will keep CPO prices above MYR3,000/tonne in the medium term. We cut our 2023F price to MYR3,900/tonne (from MYR4,300/tonne), but maintain our 2024F estimate at MYR3,500/tonne. As a result, we cut IOI’s FY22-24F earnings by 4-10%.

• Despite this, we upgrade our recommendation to BUY from Neutral, with a higher TP of MYR4.70 (from MYR4.60), as we update our target valuations. Our SOP valuation is now based on a FY24F P/E of 20x for IOI’s plantation business (from 18x), and 12x for its manufacturing unit. Our TP builds in a 2% ESG discount based on its ESG score of 2.9, which is below the country median of 3.

Source: RHB Research - 11 Aug 2022