IOI Corporation - Weak Refining Margins

Date: 
2023-11-29
Firm: 
AmInvest
Stock: 
Price Target: 
4.10
Price Call: 
HOLD
Last Price: 
4.02
Upside/Downside: 
+0.08 (1.99%)

Investment Highlights

  • We maintain HOLD on IOI Corporation with a higher fair value of RM4.10/share vs. RM4.00/share previously. We have raised IOI’s FY25F net profit by 3% to account for a stronger CPO price assumption of RM4,000/tonne compared to RM3,500/tonne originally.
  • Our revised fair value is based on FY25F PE of 18x, which is the 5-year average for large-cap planters. We ascribe a neutral 3-star ESG rating to IOI.
  • On an annualised basis, IOI’s 1QFY24 core net profit of RM298.2mil (ex-unrealised net forex gains of RM5.8mil) was within our forecast but 15% below consensus.
  • IOI’s 1QFY24 core net profit edged down by 3.7% YoY to RM298.2mil as a lower effective tax rate mostly compensated for declines in plantation and manufacturing earnings. IOI’s effective tax rate fell to 16.9% in 1QFY24 from 45.1% in 1QFY23 due to higher non-taxable income.
  • Plantation EBIT (excluding associates and fair value changes) slid by 22.3% to RM228.8mil in 1QFY24 from RM294.5mil in 1QFY23. EBIT margin shrank to 33.7% in 1QFY24 from 41.6% in 1QFY23.
  • Average realised CPO price declined by 15.7% to RM3,789/tonne in 1QFY24 from RM4,496/tonne in 1QFY23. Average palm kernel price contracted to RM2,100/tonne in 1QFY24 from RM2,524/tonne in 1QFY23. On a positive note, IOI’s FFB output expanded by 10.3% YoY in 1QFY24.
  • IOI’s manufacturing EBIT (excluding associates and fair value changes) plunged by 95% YoY to RM15.3mil in 1QFY24 as demand eased and selling prices fell. EBIT margin slipped to 0.7% in 1QFY24 from 8.6% in 1QFY23. Comparing 1QFY24 against 4QFY23, however, manufacturing EBIT surged by 70%. This was underpinned by higher refining margins.
  • In its results announcement, IOI said that it expects refining margins to remain low or negative due to stiff competition from Indonesia. Also, the outlook for the oleochemical division is subdued as the global economic environment appears weak.
  • IOI is currently trading at a fair FY25F PE of 17x, which is marginally lower than its 2-year average of 18x.

Source: AmInvest Research - 29 Nov 2023

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