Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.10/share, based on FY25F PE of 18x, which is the 5-year average for large-cap planters. We attach a neutral 3-star ESG rating to IOI.

• On an annualised basis, IOI’s 9MFY24 core net profit of RM805.7mil (ex-unrealised net forex loss of RM43.2mil) was 11% below our forecast and consensus estimates. IOI’s results disappointed due to a lower-than-estimated manufacturing EBIT margin. We have reduced IOI’s FY24E net profit by 9% to account for this.

• IOI’s core net profit slid by 25.4% YoY to RM805.7mil in 9MFY24 due to a drop in palm product prices and poor manufacturing (refining and oleochemicals) earnings.

• IOI’s plantation EBIT (ex-fair value changes and associates) retreated by 8.4% YoY to RM737.1mil in 9MFY24. Average CPO price declined by 9.6% to RM3,781/tonne in 9MFY24 from RM4,181/tonne in 9MFY23. IOI’s FFB production growth was 4.4% YoY in 9MFY24.

• Manufacturing EBIT (ex-associates and fair value changes) dived by 84.1% to RM103.8mil in 9MFY24 from RM651.6mil in 9MFY23. EBIT margin was 1.5% in 9MFY24 against 6.9% in 9MFY23. The manufacturing division suffered from lower sales volume and poor refining/oleochemical margins in 9MFY24.

• Comparing 3QFY24 against 2QFY24, however, manufacturing EBIT grew by 66.6% to RM55.3mil as processing margins improved. EBIT margin inched up to 2.3% in 9MFY24 from 1.5% in 9MFY23.

• In its results announcement, IOI said that refining margins are expected to remain low or negative. This is due to overcapacity in Indonesia and the raw material price advantage of Indonesian players. IOI also reckons that its oleochemical division would continue facing challenges amid uncertain global economy and geopolitical tensions.

• IOI is currently trading at a FY25F PE of 17.4x, which is slightly below its 2-year average of 18x.

Source: AmInvest Research - 27 May 2024