IOI Corp saw its 1QFY23 core earnings rising by 21% YoY to RM565m after stripping out i) net foreign currency (FX) translation loss on FX denominated borrowing and deposits (RM142.1m), ii) net fair value loss on derivative financial instruments (RM216m), iii) gain on disposal of 10% equity interest of an associate, iv) FX loss (RM43.5m), v) fair value loss on other investments (RM2.2m) and vi) net loss arising from changes in fair value of biological assets (RM10.9m). The results were above our and the street expectations, making up 31% and 40%, respectively. We raise our FY23-25F earnings forecasts by 6%-9% after lifting our margins for resource-based manufacturing segment. Maintain Neutral with a lower SOP-based TP of RM4.24 after we roll over our valuations to FY24. No dividend was declared for the quarter.

• 1QFY23 revenue (QoQ: -1.8%, YoY: +1%). Group revenue softened by 1% YoY to RM3.7bn, as weaker sales in plantation segment offset by stronger sales from resource-based manufacturing segment. Upstream plantation sales dropped 13% YoY to RM81m, weighed by lower FFB production. Average CPO price recorded in 1QFY23 advanced from RM4,032/mt to RM4,496/mt while FFB slipped 10.8% YoY to 665,761mt. Resource-based manufacturing sales climbed 1.3% YoY to RM3,582bn, led by higher selling prices from oleochemical and refining sub-segments despite lower sales volume from these sub-segments.

• 1QFY23 core profit grew to RM565m. The Group posted stronger core earnings of RM565m, up 21% YoY, driven by stronger earnings from resource-based manufacturing, but partially offset by weaker plantation earnings. Plantation earnings dropped 23% YoY to RM360m, dragged by higher production costs as palm kernel price declined and fertilizer cost rose. Meanwhile, resource-based manufacturing earnings doubled to RM322m, bolstered by higher margins from oleochemical and refining sub-segments.

• Outlook guidance. Management expects to see CPO price at a level above RM3,700/mt until 1Q 2023 on the back of seasonal drop in oil palm production. 2QFY23 production is expected to see a slight drop against the seasonal downward trend, as young palm trees are entering into a delayed peak production cycle and easing of worker shortage following the arrival of foreign workers. As for refinery business, demand for palm oil is expected to moderate during the winter months in the Europe while margins are volatile due to changes in Indonesia’s palm oil export levy structure, which makes its refined products more competitive. The outlook for its oleochemical sub-segment is expected to be challenging with high energy costs and the global economic slowdown. On the positive side, raw material price in particular, palm kernel oil price has moderated but we believe it could rebound with China announcing plans to relax its Covid-policy starting 1Q 2023.

Source: PublicInvest Research - 29 Nov 2022