• Maintain BUY, with new SOP-based TP of MYR4.75 from MYR4.65, 19% upside and c.3% FY24F (Jun) yield. IOI Corp’s 1HFY24 core net profit largely met our and consensus estimates. Going forward, we expect the group’s upstream earnings to improve on the back of lower costs, while downstream earnings would only see a more significant improvement from 1HFY25F. Nevertheless, valuation remains attractive – 18.2x 2024F P/E – at the lower end of its peer range of 18-20x.

• 2QFY24 core earnings came in largely in line with our and Street forecasts, at 47-48% of FY24F, with core net profit rising 11% QoQ in 2Q24. IOI declared an interim DPS of 4.5 sen (1H23: 6 sen).

• FFB output increased 5.9% YoY in 2QFY24, bringing 1HFY24 production to +7.9%, slightly higher than our 7.4% assumption but in line with its guidance of high single-digit growth for FY24. In 7MFY24, this has dropped slightly to 7.1% YoY. IOI expects FFB growth to remain relatively robust and is targeting FY24 to see production growth of 7-10% YoY. We keep our FFB growth of 7.4% for FY24F, and 3-4% for FY25F-26F.

• IOI achieved a CPO price of MYR3,736/tonne (-13% YoY) in 1HFY24. 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 MYR2,130/tonne (including PK credit) in 1HFY24 (from MYR2,300/t in FY23). Its fertiliser application in 1HFY24 is on schedule. For FY24F, IOI continues to expect unit costs to decline further by 5-10% YoY to around MYR2,100/tonne, as fertiliser and diesel costs have fallen. IOI fertiliser costs for FY24F are approximately 20% lower YoY.

• Downstream margin has slightly improved to 1.5% in 2QFY24 (from 0.7% in 1QFY24), albeit lower than the 7.7% margin recorded in 2QFY23. The decline came from the negative margin at its refineries and lower margin for its oleochemical sub-segment. However, this was offset by stronger specialty fats profit 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, while the oleochemical sub-segment is expected to start seeing an improvement in 1HFY25 once customers run down their inventory. We keep our margin assumptions at 1-3% for FY24F-26F.

• Keep BUY, with a slightly higher TP of MYR4.75 from MYR4.65, after updating its latest net debt position. We make no changes to our earning forecasts. Our SOP includes a 0% ESG premium/discount, based on RHB’s score of 3.0. Valuation remains attractive, at 18.2x 2024F, at the lower end of its peer range of 18-20x.

Source: RHB Research - 26 Feb 2024