IOI Corporation - Oleo Is Recovering

Date: 
2024-10-07
Firm: 
AmInvest
Stock: 
IOICORP
Price Target: 
4.10
Price Call: 
HOLD
Last Price: 
3.76
Upside/Downside: 
+0.34 (9.04%)
  • We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.10/share. We have rolled forward the base year used to derive our fair value from FY25F to FY26F. Our fair value of RM4.10/share for IOI is based on a PE of 18x, which is the five-year average for big cap planters. We ascribe a 3-star ESG rating to IOI.
  • We have reduced IOI's FY25F net profit by 6% and FY26F net earnings by 9% to account for a lower plantation EBIT margin of 40% each vs. 42% previously (FY24: 37.5%). We choose to be less aggressive due to inflationary pressures and risk of a hike in minimum wage in Malaysia.
  • Although the EUDR has been delayed to December 2025, IOI has already prepared for it. We believe that the large Malaysian planters would have been ready for EUDR in December 2024 as they have CPO, which are traceable and RSPO-certified. In addition, they have the resources to obtain geolocation information of the oil palm estates, which smallholders may not have.
  • To recap under the EUDR, European buyers are not allowed to buy palm products from areas, which were deforested after 31 December 2020. Penalty for non- compliance is 4% of turnover.
  • We understand that European buyers have been stocking up on palm products since July 2024 ahead of the implementation of the EUDR. We expect EU to continue stocking up in 1H2025 albeit at a slower pace than 2H2024. As a gauge of demand, average price of crude palm kernel oil (PKO) has risen by 27% YoY to RM4,989/tonne in 9M2024. PKO is a feedstock for fatty acids.
  • As such, we expect IOI's oleochemical division to perform well in 1HFY25 on the back of improved selling prices and strong demand in Europe. We forecast IOI's manufacturing (refining and oleochemicals) EBIT to climb 68.2% to RM303mil in FY25F from RM180mil in FY24. At the peak in FY23, IOI's manufacturing EBIT was RM660.6mil. We assume an EBIT margin of 3% in FY25F vs. 2% in FY24.
  • As for the upstream division, we have assumed a FFB output growth of 5% for IOI in FY25F. CPO production cost (cost of sales) is estimated to be RM2,230/tonne in FY25F compared with RM2,330/tonne in FY24. We understand that there are no issues with weather at IOI's oil palm estates in Malaysia and Indonesia.
  • IOI is expected to replant about 10,000ha of ageing oil palm trees in FY25F (FY24: 8,000ha). In spite of this, IOI is envisaged to achieve a 5% increase in FFB production due to higher mature areas in Indonesia and enhancements in FFB yields.

     

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