• Maintain BUY and SOP-based TP of MYR4.55, 15% upside and c.3% FY24F (Jun) yield. Post-analyst briefing, we remain upbeat on IOI Corp’s prospects as FFB output is set to stage a strong recovery, while unit costs should fall by 10-15% YoY in FY24F. This will be slightly offset by lower downstream margin. Still, valuation remains attractive – at 17.5x FY24F P/E, or -1.5SD from its historical mean of 22x, and is at the mid-point of its peer range of 16-20x.

• IOI expects a strong recovery in FFB output growth in FY24F of a high single digit, driven by a 20% YoY rise in Indonesia (due to young palms) as well as yield recovery following the last 2-3 years of good rainfall and a full cohort of workers now. In 1MFY24, IOI recorded FFB growth of 9.3% YoY. It expects the peak output to be later this year, around November, while any impact from El Nino is likely to only come towards end-FY24, at the earliest. As such, we raise our FFB growth forecast to 5.9% (from 2.4%) for FY24, but keep our 2.5-3.5% growth for FY25F-26F.

• IOI achieved about 9k ha of replanting in FY23, and is targeting to replant 10-11k ha in FY24, at a cost of MYR20,000/ha.

• For FY24F, IOI expects unit costs to decline 10-15% YoY to around MYR2,050/tonne, as fertiliser and diesel costs have fallen. Unit cost (excluding PK credit) was at MYR2,350/tonne in FY23, up 20% YoY. IOI managed to play catch-up on its fertiliser application in FY23, applying 100% of its requirements. IOI has tendered for its 1HFY24 fertiliser requirements at 40% lower YoY, while diesel costs have also fallen by 20- 30% YoY.

• Downstream division outlook to remain challenging in FY24F, with bright spark from specialty fats associate. Utilisation rate at its refineries was around 50-60% in FY23, on the back of intense competition from Indonesia, which also resulted in negative margin in 4QFY23. The environment is expected to remain a tough as Indonesia’s tax advantage remains. Oleochemical utilisation was better at 70-80% in FY23, but demand remains weak due to the global economic environment as well as high inventory levels at consuming countries. As inventory runs down however, demand should improve. Management is more upbeat on the outlook of its specialty fats associate, Bunge Loders Croklaan Group (BLC), given still strong demand and ongoing expansion.

• Higher capex of MYR600m targeted in FY24F, partially due to IOI participating in BLC’s new refinery and specialty fats plant in Amsterdam which will cost the former MYR500-550m.

• Maintain BUY, with a relatively unchanged TP of MYR4.55, after tweaking earnings up by 1-2% post raising of FFB output and capex assumptions. Our SOP includes a 4% ESG discount, based on RHB’s ESG score of 2.8.

Source: RHB Securities Research - 24 Aug 2023