• Maintain NEUTRAL, new SOP-based TP of MYR4.60 from MYR4.70, c.4% upside with c.4% FY22F yield. IOI’s 9MFY22 (Jun) core net profit is in line with our but above consensus estimates. Earnings were dragged by weaker margins and downstream profits, as well as higher unit costs. We believe its valuation is relatively fair at the current juncture – the stock is trading at 16x CY23F P/E (within its peer range of 15-17x) while its EV/ha of >USD40,000/ha is at the top end of its Malaysian big-cap peer range.

• 9MFY22 core earnings are broadly in line with our but above consensus forecasts, at 72% of our and 81% of consensus’FY22 projections. 3Q22 core earnings declined 26% QoQ but improved by 132% YoY.

• IOI recorded a 22% QoQ decline in FFB output in 3QFY22, bringing 9MFY22 growth to -3.4% YoY. This is in line with management’s guidance of a flat to single-digit decline YoY, due to the labour shortage impact (currently at 15-20%). In 10MFY22, the decline has risen slightly to -4.2% YoY. We keep our YoY forecasts at -4% for FY22, and +3-4% for FY23-24.

• IOI’s 9MFY22 CPO price was MYR4,518/tonne (+56% YoY), with the 3QFY22 figure at MYR5,064/tonne). IOI’s forward selling policy is generally to sell 70% of output in the first month, 10% in the second month, then minimally in the third month. However, as at the last quarter, it has sold more aggressively forward, although no details were disclosed. This would explain the group’s lower-than-market ASPs.

• We estimate CPO unit costs rose by around 15% YoY in 9MFY22. However, management expects its CPO cost to rise by about 5-10% YoY in FY22 (from MYR1,500/tonne (net PK credit) in FY21), on the back of improved productivity in 4Q22. It expects overall fertiliser costs to rise 20% YoY in FY22, based on its tenders done so far. For FY23, this could increase further – given the higher fertiliser prices currently.

• Downstream margins narrowed QoQ. This segment posted a lower EBIT margin of 2.6% in 3Q22 (from 3.2% in 2Q22 and 2.3% in 3Q21), which cut its 9M22 margin to 2.9% (9MFY21: 2.8%) – on lower contributions from subsidiary Bunge Loders Croklaan (Bunge) and lower sales volumes and margins from the refining sub-segment. This was slightly offset by a higher contribution from oleochemicals. As such, we trim our EBIT margin assumptions, to 2.3-3.3% (from 3-4%) to account for the lower refining margins.

• We lift FY22-24F earnings by 6-22% after adjusting for our new CPO price per tonne assumptions of MYR4,865 (from MYR4,350) for FY22, MYR4,800 (from MYR3,950) for FY23 and MYR3,900 (from MYR3,550) for FY24. We also lower downstream margins and adjust for higher earnings from its associate.

• Post-earnings estimates revision, our SOP-derived TP drops to MYR4.60 (from MYR4.70), after rolling forward our valuations to FY24, based on: An unchanged 18x P/E for the plantation division, 12x P/E for its downstream segment, and the value of its stake in Bumitama Agri (BAL SP, BUY, TP: SGD0.95) based on our latest TP for the stock. Our SOP includes a 2% ESG discount, based on RHB’s score of 2.9.

Source: RHB Research - 23 May 2022