IOI Corporation - Better Earnings Ahead

Date: 
2023-11-29
Firm: 
KENANGA
Stock: 
Price Target: 
3.80
Price Call: 
HOLD
Last Price: 
3.98
Upside/Downside: 
-0.18 (4.52%)

IOICORP’s 1QFY24 results disappointed. Its earnings strengthened QoQ mainly on better FFB harvest and easier cost while CPO prices held well. Its downstream margin also recovered but fell short of our expectation. We cut our FY24-25F net profit forecasts by 7% and 3%, respectively, but keep our TP of RM3.80 and MARKET PERFORM call.

1QFY24 core net profit (excluding RM15m fair value gains and RM9m forex losses) disappointed, accounting for only 20% and 22% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from poorer-than-expected downstream performance.

Its 1QFY24 plantation unit saw operating profit soaring to RM314.5m (+79% QoQ, +7% YoY) amidst robust FFB production (0.734m MT; +19% QoQ, +10% YoY) and easier cost while CPO price softened a little to RM3,789 per MT (-3% QoQ, -16% YoY). 32%-owned Bumitama Agri (BAL) earnings rose 15% QoQ and 33% YoY. Downstream margins remained under pressures on weak demand and margins even though 1QFY24 profitability recovered significantly QoQ thanks to better refining margins which helped offset still poor oleochemical performance. Net gearing nudged up very slightly from 14% as at 30 June 2022 to 15% after paying RM310m in dividends. No dividend was declared which is the norm for its 1QFY.

Better upstream margins ahead as CPO prices should hold firm on relatively tight global edible oils supply. Edible oil demand looks set to continue growing at a 3%-4% YoY trajectory. 2024 supply is also expected to grow but not very much and dry weather is affecting ongoing soya planting in Brazil while oil palm yields in SE Asian are affected by ageing trees. Fortunately, El Nino has not affected Malaysia much but parts of Kalimantan have seen dryness for a month or two. Altogether, we expect CPO prices to average at RM3,800 per MT over FY24-25. Costs are also expected to ease as fertiliser prices are now 20%-30% lower than a year ago. Fuel costs are also lower YoY while FFB production is higher with the labour shortfall generally addressed.

Downstream to continue facing headwind. IOI’s downstream focuses more on specialty and customised products which command better pricing and margins but the operations are not immune to intense competition and demand headwinds. Aside from facing weak demand, its European operations are also enduring rising wages, not to mention energy pressures even if inflation could be abating.

Forecasts. We cut our FY24-25F net profit forecasts by 7% and 3%, respectively, to reflect weaker downstream contributions.

However, we maintain our TP of RM3.80 based on 2.0x PBV, in-line with the average PBV for large integrated planters, plus a 5% premium to reflect a 4-star ESG rating as appraised by us (see page 3).

We continue to like IOI for its efforts in the followings: (i) improving planting materials, (ii) increasing digitalisation, (iii) building infrastructures for greater mechanisation as well as (iv) converting oil palm trunks into net zero palm-based wood products. However, much of the fruit will only bear out in the medium to long term. Whilst earnings should improve over the next one to two quarters, subdued full-year earnings are still expected for FY24-25 on flattish CPO prices with some margin improvement from easier costs. Maintain MARKET PERFORM.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues; (ii) impact of weather and labour shortages on production, (iii) weak CPO and palm kernel prices, and (iv) cost inflation particularly fertilizers.

Source: Kenanga Research - 29 Nov 2023

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