• Maintain BUY, with new SOP-based TP of MYR4.35 from MYR4.55, 11% upside and c.3% FY24F (Jun) yield. 9MFY23 core net profit came in largely within our, but above consensus estimates. We expect 4Q earnings to remain flattish as FFB output improves but CPO ASP declines. Still, valuation remains attractive – at 16.3x FY23F P/E, more than -3SD from its historical mean of 23x, and at the low end of its peer range of 15-18x.

• 9MFY23 core earnings are largely in line with our, but above Street forecasts, at 70% and 80% of FY23F. We expect IOI Corp to record weaker earnings in 4Q, on the back of lower CPO prices and downstream margins.

• IOI recorded a 2.3% YoY decline in FFB output in 1HFY23, which is below management’s guidance of a flat to single-digit increase for FY23F. This has since moderated to a decline of 3.1% in 10MFY23. We understand that while the company no longer has any labour shortage (from 10% in 2Q23), it has reduced FFB growth guidance to flat to single-digit decline for FY23. As such, we cut our FFB growth forecasts to -2.5% (from +4.5%) for FY23, but keep our 3-4% growth for FY24-25.

• IOI achieved CPO price of MYR3,928/tonne (-22% YoY) in 3QFY23 bringing 9MFY23 average price to MYR4,181/tonne. We understand that it generally sells forward about 20-50% of its output 3-4 months ahead.

• Unit cost was around MYR2,600/tonne (excluding PK credit) in 9MFY23 and is expected to remain at these levels in FY23F. IOI remains behind in its fertiliser application and hopes to do some catching up in 4QFY23. We understand 1HFY23 fertiliser prices were tendered at 25-30% higher, but 2H was lower, resulting in FY23F prices at 10-20% higher YoY.

• Downstream margin fell to 3.7% (from 7.7% in 2QFY23) in 3QFY23, bringing 9MFY23 margin to 6.9% (9MFY22: 2.9%). The YoY rise came from the higher margin at its refining sub-segment, but slightly offset by lower sales volumes for refining and oleochemicals. The QoQ decline was due to the normalising of refining margins post reinstatement of Indonesian tax levies in mid-Nov 2022. Refining margins have since turned negative. We lower our margin assumptions to 2-4% (from 4-5%) for FY23F-25F.

• We cut FY23F-25F earnings by 12-14%, after reducing FFB output, lowering PK prices, lowering downstream margins, and updating associate Bumitama Agri’s (BAL SP, NEUTRAL, TP: SGD0.60) latest forecasts.

• Maintain BUY, with a lower TP of MYR4.35 (from MYR4.55), after updating its latest net debt position. Our SOP includes a 4% ESG discount, based on RHB’s revised score of 2.8.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 31 May 2023