1QFY23 core net profit of RM618.5m (+4.6% QoQ; +43.3% YoY) accounted for 45%/35% of our/consensus full-year estimates. We consider the results within our expectation (but below consensus), in anticipation of lower palm product prices ahead. We lower our FY23-24 core net profit forecasts by 8.3-13.6%, mainly to reflect lower CPO price assumptions of RM4,500/mt for FY23 and RM3,900/mt for FY24 (following the downward revision in our sector CPO price assumptions earlier) and higher margin assumption at downstream segment. Forecast for FY25, on the other hand, is raised by 2.4% mainly to reflect high margin assumption for manufacturing segment. Post earnings revision, we maintain our BUY rating on IOI, with a lower TP of RM4.36 based on 22x revise d CY24 core EPS of 19.8 sen.

Within our expectation. 1QFY23 core net profit of RM618.5m (+4.6% QoQ; +43.3% YoY) accounted for 45%/35% of our/consensus full-year estimates. We consider the results within our expectation (but below consensus), in anticipation of lower palm product prices ahead.

EIs in 1QFY23. Core net profit of RM618.5m was arrived after adjusting for (i) RM142.1m forex translation loss, (ii) RM216m fair value loss on derivatives, (iii) RM10.9m fair value loss on biological assets, (iv) RM43.5m forex loss, (v) RM2.2m fair value gain on other investments, (vi) RM17.2m disposal gain, (vii) RM535m write downs and impairment.

QoQ. Core net profit increased by 4.6% to RM618.5m in 1QFY23, as margin expansion at oleochemical and refining sub-segments as well as high sales volume from refining sub-segment (resulted in operating profit at manufacturing segment rising by 88.5% to 307.2m) more than mitigated weaker contribution from plantation segment arising from lower realised palm product prices (CPO: -14.5%; PK: -34.4%) and higher production cost. During the quarter, FFB output increased by 8.9% to 666k tonnes, due to seasonal factor.

YoY. Core net profit surged by 43.3% to RM618.5m in 1QFY23, boosted by sharply higher contribution from manufacturing segment (arising from margin expansion at oleochemical and refining sub-segments, but partly moderated by lower sales volume), which more than mitigated weaker plantation earnings (arising from lower FFB output and higher production cost, but partly mitigated by higher CPO price realised).

Outlook: challenging times ahead. For manufacturing segment, demand for palm oil likely moderate in 2QFY23, on the back of (i) winter months in the Northern Hemisphere, (ii) volatile refining margins changes in Indonesia’s palm oil export levy structure, and (iii) high energy cost and economic slowdown, which will likely affect operating conditions at oleochemical sub-segment. On the other hand, earnings at plantation segment will likely be affected by lower palm product prices and elevated input costs (including fuel and fertiliser prices).

Forecast. We lower our FY23-24 core net profit forecasts by 8.3-13.6%, mainly to reflect lower CPO price assumptions of RM4,500/mt for FY23 and RM3,900/mt for FY24 (following the downward revision in our sector CPO price assumptions earlier) and higher margin assumption at downstream segment. Forecast for FY25, on the other hand, is raised by 2.4% mainly to reflect high margin assumption for manufacturing segment.

Maintain BUY with lower TP of RM4.36. Post earnings revision, we maintain our BUY rating on IOI, with a lower TP of RM4.36 (from RM4.65 earlier) based on 22x revised CY24 core EPS of 19.8 sen.

Source: Hong Leong Investment Bank Research - 29 Nov 2022