• Maintain BUY, SOP-based TP drops to MYR4.40 from MYR4.75, 11% upside with c.2% FY24F (Jun) yield. IOI Corp’s 9MFY24 core net profit came in below our and consensus estimates. We expect its upstream earnings to improve on the back of lower costs, while downstream earnings should see gradual improvements from the oleochemical and specialty fats segments. Nevertheless, its valuation remains attractive – at 20x 2024F P/E – which is at the lower end of its peer range of 20-25x.

• 3QFY24 core earnings are below our and Street forecasts, at 66-68% of FY24 estimates, with core net profit falling 24% QoQ in 3Q24. The main discrepancy was from the lower-than-expected associate earnings, slightly lower-than-expected FFB output and higher-than-expected unit costs.

• FFB output dropped by 3.5% YoY in 3QFY24, bringing 9MFY24 production to +4.4%, below our 7.4% assumption and management’s guidance of 7-10% for FY24. In 10MFY24, this has risen slightly to 5.3% YoY. IOI has now trimmed its FFB growth guidance to 7% for FY24F. We cut FY24F FFB growth to 5% (from 7.4%), but maintain 4-5% growth estimates for FY25-26.

• Estimated unit costs rose by around 14% QoQ in 3QFY24, due to the lower FFB output. Management has estimated its unit cost to be around MYR2,250/tonne (including PK credit) in 9MFY24 (from MYR2,130/tonne in 1HFY24). For FY24F, IOI is now expecting unit costs to decline by 4-5% YoY to MYR2,200/tonne (from previous guidance of MYR2,100/tonne), likely due to lower output guidance. We raise our unit costs accordingly. We understand IOI’s fertiliser costs for FY24F are approximately 20% lower YoY, while its application in 9MFY24 is on schedule.

• Downstream margin improved further QoQ to 2.3% in 3Q24 (from 1.5% in 2QFY24, bringing the 9MFY24 margin to 1.5% (from 6.9% in 9M23). The YoY decline came from the negative margin at its refineries and the lower margin for its oleochemical sub-segment. We continued to see sequential improvements at its specialty fats associate, driven by its North American business and improving demand from Europe. Going forward, IOI expects its refinery margin to remain weak due to stiff competition from Indonesia, while the oleochemical and specialty fats sub-segments should continue improving as customers have mostly already run down their inventory levels. We keep our margin assumptions at 1-3% for FY24-26F.

• Keep BUY, with a lower SOP-based TP of MYR4.40. We trim FY24-26F earnings by 5-10% after lowering FFB growth and associate earnings estimates, and raising unit cost assumptions slightly. Our SOP has a 0% ESG premium/discount built in, based on IOI’s ESG score of 3.0, and includes its updated net debt position. Its valuation remains attractive, at 20x 2024F P/E – which is at the lower end of its peer range of 20-25x.

Source: RHB Research - 27 May 2024