IOI Corporation Berhad - Gloomy Outlook for Downstream Persists

Date: 
2024-02-26
Firm: 
TA
Stock: 
Price Target: 
3.79
Price Call: 
SELL
Last Price: 
4.05
Upside/Downside: 
-0.26 (6.42%)

Review

  • IOI Corporation’s (IOI) 2QFY24 results came in below expectations. Excluding the forex impact and other non-core items, 2QFY24 core net profit decreased by 27.3% YoY to RM290.3mn on the back of a 27.5% plunge in revenue. The 1HFY24 core net profit accounted for 40% and 43% of our and consensus’ full-year estimates. The deviation was mainly due to lower contribution from the downstream division and higher operating costs.
  • Cumulatively, 1HFY24 core net profit plunged to RM564.8mn (38.6% YoY) in tandem with a 34.0% drop in revenue.
  • Plantation: Despite higher FFB production (+7.9% YoY), 1HFY24 operating profit fell 16.0% YoY to RM520.3mn, dragged by lower palm oil prices. The CPO and PK prices declined 13.0% and 10.5% YoY to RM3,736/tonne and RM2,085/tonne, respectively.
  • Manufacturing: 1HFY24 operating profit plunged 91.3% YoY to RM48.5mn. Excluding the non-core items, the core profit dropped by 88.7%. The weak results were mainly due to lower margins from the oleochemical and refining sub-segments.
  • The group declared a first interim single-tier dividend of 4.5sen/share for the quarter under review (vs. 6.0 sen in 2QFY23).

Impact

  • We tweak our FY24 and FY25 earnings lower by 17.9% and 5.5% after factoring in lower-than-expected 2QFY24 results and lower contribution from the downstream division.

Outlook

  • Management expects the CPO price to stay close to or above RM4,000 a tonne in March and April. For full-year 2024, it is expected to hover at the current level.
  • FFB production is expected to grow in the range of 7-10% in FY24 due to increased efficiency of fully replenished new workers in Peninsular Malaysia and higher production from the young palm trees in Indonesian plantations.
  • Meanwhile, management expects the outlook for the downstream oleochemical sub-segment to remain challenging due to stiff competition from Indonesian refiners, the slowdown in global demand and rising geopolitical tensions. Management expects that the current low or negative refining margins to remain.

Valuation

  • Post the earnings downgrade, the target price is revised lower to RM3.79/share (RM4.27 previously), based on CY24 PER of 18x. Given the lack of major re-rating catalysts in the near term, we downgrade IOI to SELL (from Hold).

Source: TA Research - 26 Feb 2024

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