Investment Highlights

• We maintain HOLD on IOI Corporation with an unchanged fair value of RM4.10/share, based on FY25F PE of 25x, which is the 5-year average for big-cap planters. We ascribe a neutral 3-star ESG rating to IOI.

• IOI is practising a circular economy as reflected in its pulp and wood panel ventures. Waste from oil palm tree such as the trunk and empty fruit bunches are used to produce pulp and wood panel products. We believe that these are long-term investments and payback period might be more than 5 years.

• IOI’s effective stake in the pulp factory in Pekan, Pahang is 34%. Nextgreen Global will hold 41% while Xiamen C&D Inc will own the balance 25%. The pulp factory is expected to cost RM600mil in total and will command an annual production capacity of 100,000 tonnes upon completion. Off-takers are envisaged to be Xiamen C&D and Marubeni Corp. IOI’s share of the capex is RM204mil. The plant is envisaged to be completed in 2027F.

• Sales volume of wood panels from IOI’s factory in Johor is soft currently. We believe that sales and production volumes would gradually increase in the coming years. Recall that the wood panel factory, which cost about RM150mil, was completed last year.

• As for plantation, we assume that IOI’s FFB production would rise by 5% in FY25F (FY24: +4.4%, FY23: -1.5%). Despite recent news of floods in Sabah, there have not been major weather issues at IOI’s oil palm estates in Malaysia and Indonesia. All-in cost of production is estimated to be lower at RM2,300/tonne in FY24E compared to RM2,500/tonne in FY23 as fertiliser costs have eased.

• Demand for IOI’s oleochemical products is improving. Most of IOI’s fatty acids are sold in Asia, which is more resilient than Europe. However, operating conditions in the palm refining industry are challenging due to competition from Indonesia. We forecast IOI’s manufacturing EBIT (oleo and refining) to improve by more than 30% in FY25F after plunging by 57% in FY24E.

• IOI is prepared for the EU Deforestation Regulation (EUDR), which will be implemented at the end of 2024F. About 97.4% of the group’s CPO and 91.4% of crude PKO are traceable to the plantations.

• IOI is currently trading at a FY25F PE of 16.6x, which is below its 5-year average of 18x.

Source: AmInvest Research - 22 Jul 2024