IOICORP’s FY24 results came in 9% shy of expectations. Core net profit declined 24% YoY on weaker CPO prices and downstream profits, cushioned by better FFB production and associate contributions. However, upstream profits should stay firm moving ahead while downstream recovers slightly. Maintain FY25F core net profit but nudge up TP by 10% to RM4.20 as we re-based 2X PBV on FY25 instead of FY24. Upgrade our call from MARKET PERFORM to OUTPERFORM.

FY24 core net profit dipped 24%% YoY to RM1,152m (after excluding fair value gain (RM33m), forex loss (RM74m) and RM3m impairment) which came in 9% shy of both Kenanga and consensus forecasts. The main variance against our forecast was attributable largely to mixed 4Q associate contributions and overall soft downstream performance. A 5.0 sen final dividend was declared, bringing full year DPS to 9.5 sen, but lower than the expected 11.0 sen.

4QFY24 core net profit improved QoQ and YoY on better CPO and PK prices while FFB output also rose and cost stayed subdued, overcoming weak downstream profits. Earnings from associates were mixed – upstream Bumitama Agri did well QoQ but dipped YoY while downstream associate, Bunge Loders Croklaan, was weaker QoQ but better YoY. QoQ, net debt fell, from RM1.849b (16% net gearing) from end-March position to RM1.574b (13% net gearing).

Healthy upstream outlook. IOI guided for a satisfactory upstream which should see healthy margin on firm CPO prices with cost pressures staying manageable. While higher minimum wages in Malaysia is expected in a 6-18 months’ timeframe, fertiliser and fuel costs should hold at current levels, and the rise since end 2023 in PK prices should help temper overall production cost of CPO. We expect CPO prices to average at RM3,800/MT for FY25-26 as global edible oil supply is not likely to outstrip demand, with resultant inventory levels supportive for prevailing prices.

Downstream to stay under pressure but could be bottoming. Intense refining competition continues and so is tepid European demand amidst wage inflation and energy supply headwinds. Nonetheless, we suspect the worst might be over with recovery, albeit modest, expected in FY25 onwards. This would be on higher-margin specialty and customised products to lead an expected modest downstream recovery as European buyers stock up ahead of new de-forestation regulations pending end of this calendar year.

Growth from palm oil circular economy. Following its Jul 2023 launch of palm-based wood products, IOI entered into a tripartite JV in April 2024 to develop non-wood pulp instead from Empty Fruit Bunches (EFB). Nextgreen Global Berhad (NGGB, Not Rated) will be driving the overall project with Xiamen C&D Corp (XCD) to focus on marketing and fund raising while IOI will guide on upstream EFB supply chain support.

Forecasts. Maintain FY25F core EPS and introduce FY26 forecasts.

Valuations. Upgrade TP from RM3.80 to RM4.20 as we continue to adopt 2.0x PBV valuation which is within the PBV range of large integrated planters but roll forward our valuation base year from FY24 to FY25. A 5% premium is also reflected in view of IOICORP’s 4-star ESG rating as appraised by us (see page 3).

Investment case. We like IOICORP for its use of higher yielding planting materials, pro-active adoption of mechanisation and digitalisation to improve productivity, converting oil palm trunks into net zero palm-based wood products or EFB into pulp as well as higher value downstream focus. However, much of the fruits will only bear out in the medium to long term. Over FY25- 26, firm upstream earnings are expected while downstream should stay subdued but improving. Upgrade to OUTPERFORM.

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 fertilisers.

Source: Kenanga Research - 27 Aug 2024