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Maintain BUY and SOP-based TP of MYR4.65, 15% upside with c.4% FY23F (Jun) yield. IOI Corp expects some alleviation of its labour shortage by end-2022, while CPO prices are expected to stay supported at above MYR4,000/tonne until year-end. Given our expectations of volatile CPO prices, we believe it will perform better than peers, due to its integrated business model. Valuation remains attractive – trading at 15x FY23F P/E, more than -2SD from its historical mean of 23x.
FFB growth to improve. In 1MFY23, FFB output fell by 17% YoY. Still, IOI expects this pattern to reverse in the coming months, as it is seeing improvements in output already, thereby hoping for up to 10% FFB output growth in FY6/23. This would also be dependent on its ability to hire more workers in coming months. Currently, its Peninsular Malaysia estates (about 60% of group landbank) are facing a 50% labour shortage, while Sabah (25% of landbank) is facing a 7-10% shortage. It received the first batch of 60 new workers three weeks ago, and is expecting 600 more by end September. This will reduce its labour shortage to 25% (or 900 workers). We keep our FY23F FFB growth of 5% to be conservative.
Some forwards locked in at above MYR5,000/tonne. FY22 CPO ASP achieved was MYR4,688, lower than the Malaysia Palm Oil Board (MPOB) average of c.MYR5,550. IOI anticipates its CPO ASPs to be slightly higher than spot prices in the coming months, as it has locked in 20-50% of its production four months forward at prices above MYR5,000/tonne. Management is of the view that CPO prices would be around at least MYR4,000 until December.
Unit cost for FY22 rose c.20% YoY to MYR2,500(including cess and taxes but excluding PK credit), which was lower than expected due to lower fertilisation activities. IOI only applied 60% of its FY22 fertiliser requirements due to labour shortage. For FY23, it is able to utilise the carry forward unused fertiliser from FY22, while it has tendered for its 1HFY23 fertiliser requirements at prices 25-30% higher YoY. As such, IOI anticipates FY23 unit cost to be 4-5% higher, as higher fertiliser costs would be offset by improved productivity.
80% YoY rise in EBIT from its downstream division in FY22, the bulk of which was contributed by its oleochemical subsegment. While IOI expects margin to reduce given higher costs like energy and stiffer competition at its refinery sub-segment, this should be offset somewhat by a double-digit rise in sales volumes, aided by itsnew 110,000-tonne fatty acid and soap noodles plant coming onstream in the next few months.
Maintain BUY call, earnings forecasts and SOP-based TP of MYR4.65. Our TP isbased on an unchanged 20x FY24F P/E for the plantation division, 12x P/E for its downstream segment, and the value of its stake in Bumitama Agri (BAL SP, BUY, TP: SGD0.80) based on our latest TP. It also includes a 2% ESG discount, given its ESG score of 2.9.
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