• Maintain BUY, with new MYR4.80 TP from MYR4.55, 22% upside and c.3% FY24F (Jun) yield. We raise our ESG score for IOI Corp given the various improvements made in 2022. We believe the company is well positioned to comply with the European Union (EU) Deforestation Regulation (EUDR). Valuation is also attractive, at 17x 2024F P/E, at the lower end of its peer range of 16-20x.

• The EUDR is not unsurmountable. While there are a myriad of problems and issues in complying with the EUDR guidelines based on current regulations, we believe there are also numerous solutions. The Malaysian and Indonesian Governments working together with the EU to find solutions is a step in the right direction – especially if Malaysia and Indonesia are classified as “Low Risk”. Aligning definitions are key to achieving compliance and ensuring everyone is on the same page.

• The EU needs to help, otherwise this problem will be shifted elsewhere. At the end of the day, if the EU fails to help producing countries like Indonesia and Malaysia in complying with the EUDR, it will push producers to export more of their commodities to countries with weaker environmental regulations, thereby shifting the problem to other regions.

• Uplifting smallholders means uplifting the sector. As smallholders manage 40% of plantation areas in Indonesia and Malaysia, this sector will only progress if they are taken care of and well updated with the changes in laws and regulations. As discussed previously, the main hurdle of achieving traceability lies with obtaining data from third-party suppliers, including smallholders. In order to address this, continuous engagement with the smallholders is essential to educate them on the importance of establishing a sustainable business, while the necessary tools must be given to the smallholders to help them to achieve these goals.

• We believe the sector in general is moving in the right direction in terms of ESG standards, with more disclosure and targets being set. However, we note that there are some outliers which have yet to make any improvements to ESG disclosures as well as ESG targets.

• We raise our ESG score for IOI to 3.0 (from 2.8). We saw various improvements in the “Environment” pillar including improved traceability, lower greenhouse gas (GHG) emissions, increased certifications and renewable energy usage. We also saw better governance indicators like higher female Board representation and increased Independent Director composition.

• Maintain BUY call with a higher SOP-based TP of MYR4.80. We believe IOI is well positioned to comply with the EUDR and could take on more market share in the EU as a result. Valuation is attractive, at 17x 2024F P/E vs its peer range of 16-20x.

Source: RHB Securities Research - 21 Nov 2023