Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM3.55/share, based on a FY23F PE of 18x and 3-star ESG rating.

•  IOI’s 1QFY23 core net profit (ex-unrealised forex loss of RM142mil) was within our forecast but 20% below consensus estimates.

• The group’s core net profit inched up by 2% YoY to RM310mil in 1QFY23 on the back of stronger manufacturing (refining and oleochemical) earnings.

• Plantation EBIT (including associate and fair value changes) declined by 28% YoY to RM352mil in 1QFY23, dragged by higher cost of production and lower volume of production. IOI’s FFB production fell by 11% YoY in 1QFY23.

• Although average realised CPO price rose, this was not enough to offset the increase in the cost of production. IOI’s average realised CPO price improved by 12% to RM4,496/tonne in 1QFY23 from RM4,032/tonne in 1QFY22.

• We attribute the increase in IOI’s cost of production per tonne in 1QFY23 to fertiliser and wages. We estimate IOI’s cost of production (EBIT level) to be RM2,500/tonne in FY23F vs. RM2,300/tonne in FY22.

• IOI’s manufacturing EBIT (including associates and fair value changes) climbed to RM129mil in 1QFY23 from RM46mil in 1QFY22 on higher margins from the refining and oleochemical segments.

• Manufacturing earnings would have been higher in 1QFY23 if IOI had not recorded fair value losses on derivatives. Fair value losses on derivatives widened to RM193mil in 1QFY23 from RM108.7mil in 1QFY22. Manufacturing EBIT margin rose to 3.6% in 1QFY23 from 1.3% in 1QFY22.

• Going forward, IOI said that operating conditions in the oleochemical division are expected to be challenging due to high energy costs and global economic uncertainties. On a positive note, cost of palm kernel oil is still low and there is upside in China as the country has announced relaxation of Covid lockdown rules.

• IOI is currently trading at a FY23F PE of 20x, which is in line with its 2-year average.

Source: AmInvest Research - 29 Nov 2022