• Maintain BUY and MYR4.35 TP, 16% upside with c.3% FY23F yield. We visited IOI Corp’s Gomali estate, mill and Palm Wood plant in Johor recently, and came away impressed with the level of mechanisation at the estate and versatility and broad range of use of Palm Wood products. While we do not expect Palm Wood to contribute significantly to group earnings, we believe this product will boost its sustainability credentials.

• IOI’s Gomali estate in Johor has 2,171 ha of planted oil palm land, while the Gomali mill has a capacity of 120 tonnes per hour. Within the mill complex, there is also a biogas plant and effluent treatment plant (where methane gas is captured from palm oil mill effluent to generate electricity). We saw abundant fruit on the trees, while management noted that there has been enough rainfall – so production should spike up in the next six months.

• We saw IOI’s efforts at mechanisation with machines such as: i) A battery-operated cutter, which provides manpower savings of up to 20%; ii) electric mechanical carts that are used for infield collection; iii) tractor grabber mainline and hooklift which are used in mainline FFB evacuation. IOI has also digitalised the grading of its FFB via an electronic plantation monitoring system (EPMS) in a handheld device. IOI’s estates are staffed by a full workforce now, with a man:land ratio of 1:8. Over the longer term, with increased mechanisation, it aims to boost this ratio to an optimal 1:12.

• IOI’s Palm Wood facility in Segamat is the first in Malaysia and is an 80%- owned JV. Here, old palm oil trunks are converted into OnCore® Palm Wood panels which are lightweight, fire retardant and a good insulator. It can be used in the building, furniture and joinery industries. This MYR160m plant was built in 13 months, and has an annual capacity of 80,000 cu m. It is now 90-95% ready, and will start commercial operations on 1 Jul. IOI expects ROI to be >10% in around 7-8 years, based on current market prices. We understand IOI will be sourcing its palm oil trunks from RSPO- certified estates nearby.

• We are excited at the prospects of the Palm Wood venture, given its sustainability qualifications – and these products could help customers boost their ESG credentials. While pricing has yet to be set, similar blockboard products from low-density timber species are currently selling at USD300-350/cu m. We would expect Palm Wood to have a lower cost base, since the biggest raw material cost is for a waste product which can be sourced directly from its own estates. Nevertheless, it would take some time for IOI to build a client base and ramp up production, as these are new products which need to be tested by customers first. We do not expect this venture to contribute to earnings significantly in the initial years.

• We maintain our forecasts. IOI is still one of our sector Top Picks – given its integrated business model, decent valuations and commitment to sustainability. Our SOP-based TP includes a 4% ESG discount.

Source: RHB Research - 3 Jul 2023