In a recent conference call with IOI Corp, management expects to see a stronger performance in FY22 on the back of bullish CPO price performance despite flattish FFB production. Meanwhile, it has locked in a small portion of CPO sales at RM4,600/mt. Management also plans to achieve 100% RSPO certification by 2023 after resolving the disputed area in Sarawak concession and the completion of the remaining new plantings in Kalimantan. Despite the record CPO prices, we maintain Neutral call on IOI Corp with an unchanged SOP-based TP of RM4.41 given the limited upside potential.

• Diversifying into other crops. The Group plans to diversify into other high-value crops to reduce the high dependency on palm oil revenue. It has started planting pineapples in Johor as an intercrop to its total planted area of about 300ha of coconut trees. We understand that pineapples and coconut are cash crops and it may take up to a year to mature. There are plans to plant another 1,000ha of coconut trees and 300ha of kenaf within the next two years. Kenaf will be planted in flood prone area as it can withstand flood. Once it has achieved sizeable plantation area, the Group will explore various processing facilities to cater for the markets. Apart from catering for local consumption, coconuts can be sent to its oleochemical plant in Germany for downstream processing. In addition, it also plans to convert oil palm by products and processing waste into value-added products at competitive cost. It has recently awarded contracts for the construction of a palm wood factory in Segamat, Johor to convert oil palm trunks into high performance palm wood boards and panels to cater for European markets.

• Aiming to increase oleochemical earnings by RM100m. The Group has commenced construction of a new 110,000mt/year oleochemical plant in Prai, Penang with a capex of RM220m. It is slated to be completed by 2Q of 2022 and is targeted to grow its FY21 oleochemical earnings by more than 35%. The new plant is mainly catered for the palm and palm kernel based fatty acids and glycerine, which are the main raw materials for personal care and cosmetic products.

• Flattish FFB production growth. Management is expecting stagnant FFB production for FY22 due to the aggressive replanting target of 7,100ha. It still has a remaining 500ha plantable area in Kalimantan, which will be completed by end-FY22. Meanwhile, total mature area is expected to increase by 3,000ha to about 147,000ha. Despite higher fertilizer cost (+20% YoY) and stagnant FFB production level, the Group targets to maintain its production cost of RM1,500/mt on the back of higher contribution from palm kernel credit.

• Allocating higher capex. Management has allocated higher capex of RM500m for FY22, an increase of 23% YoY. About RM300m is catered for replanting and new planting activities while the remainder goes to oleochemical business.

Source: PublicInvest Research - 11 Oct 2021