• Maintain BUY, with new SOP-based TP of MYR4.65 from MYR4.80, 17% upside and c.3% FY24F (Jun) yield. IOI Corp’s 1QFY24 core net profit came in slightly below our and consensus estimates. Going forward, we expect the group’s upstream earnings to improve on the back of lower costs, while downstream earnings could remain weak due to its negative refining margin. Nevertheless, valuation remains attractive – at 16.5x FY24F P/E, at the lower end of its peer range of 16-20x.

• 1QFY24 core earnings came in slightly below our and Street forecasts, at 21-22% of FY24F. The main discrepancy came from lower-thanexpected EBIT margin at its downstream division of 0.7% (vs 8.6% in 1QFY23) caused by negative margin at its refinery division.

• FFB output increased 10.3% YoY in 1QFY24, slightly above its guidance of high single-digit growth for FY24, and higher than our 5% assumption. In 4MFY24, this has risen further to 11.5% YoY. We expect this growth to decrease, however, given IOI’s aggressive replanting schedule of 10,000ha in FY24. Other than the slight dryness in Kalimantan in September, the weather has remained conducive. IOI is keeping to its high single-digit FFB growth forecast for FY24. We raise our FFB growth to 7.4% (from 5%) for FY24F, but keep our 3-4% growth for FY25F-26F.

• IOI achieved a CPO price of MYR3,789/tonne (-16% YoY) in 1QFY24. We understand that it generally sells forward about 20-50% of its output 3- 4 months ahead. We project a CPO price of MYR3,900/tonne for FY24F.

• Unit cost was around MYR2,2250/tonne (excluding PK credit) in 1QFY24 (from MYR2,350/t in FY23). IOI’s fertiliser application in 1QFY24 is on schedule. For FY24F, IOI continues to expect unit costs to decline further by 10-15% YoY to around MYR2,050/tonne, as fertiliser and diesel costs have fallen. IOI has tendered for its 1HFY24 fertiliser requirements at 40% lower YoY, while diesel costs have also fallen by 20-30% YoY.

• Downstream margin fell to 0.7% (from 8.6% in 1QFY23) in 1QFY24, albeit slightly higher than the 0.5% margin recorded in 4QFY23. The decline came from negative margin at its refineries and lower margin for its oleochemical segment. However, this was offset by stronger specialty fats profits at its associate level driven by its North American business. Going forward, IOI expects refinery margin to remain weak due to stiff competition from Indonesia. The oleochemical sub-segment could also remain subdued due to the weak global economic environment, although its new fatty acid and soap noodle plant is operating on a lower cost structure which should bring up average margins going forward. In light of this, we lower our margin assumptions to 1-3% (from 1.5-3.5%) for FY24-26.

• Keep BUY, with a lower TP of MYR4.65, after updating its latest net debt position and trimming our earnings 2-5% for FY24F-26F. Our SOP includes a 0% ESG discount, based on RHB’s score of 3.0. Valuation remains attractive, at 16.5x FY24F, at the lower end of its peer range of 16-20x.

Source: RHB Securities Research - 29 Nov 2023