1QFY25 reported a profit surge on huge currency gains. Adjusting for such non-core items, 1Q core net profit (CNP) still inched up QoQ and YoY to meet consensus but was 5% below Kenanga's forecast. Stronger upstream was offset by weaker downstream performance. Better upstream earnings are now expected ahead but to be offset by more muted downstream recovery. Maintain FY25-26F CNP, TP of RM4.30 and our OUTPERFORM call.

1QFY25 CNP inched up 5% QoQ and 1% YoY to account for 22% of our forecast and 24% of consensus full-year estimate. After adjusting out net forex gain of RM335m and net fair value gain of RM73m, 1QFY25 CNP stood at RM303m as upstream EBIT rose 12% QoQ as well as YoY but downstream fell 74% QoQ and 33% YoY. Earnings from associates were mixed - upstream Bumitama Agri did better QoQ but poorer YoY while downstream associate, Bunge Loders Croklaan (BLC) improved QoQ as well as YoY. Net debt declined QoQ, from end June of RM1.574b (13% net gearing) to RM1.466b (12% net gearing) but no 1Q dividend was declared, which is in line with IOI's past practice and within our expectation.

Outlook for upstream remains positive thanks to firm CPO prices while input cost should stay manageable. Despite higher minimum wages from Feb CY25 onwards, other input costs notably fertiliser should stay soft while stronger MYR and PK price are expected to further help contain overall production costs. We now expect CPO prices to average at RM4,100/MT for FY25-26 (instead of RM4,000 previously) as global edible oil supply tightness is nibbling inventory which is supportive of edible oil prices.

Downstream recovery looks to be slower than expected. Refining competition continued stay intense amidst regional over capacity and is likely to stay so. Meanwhile oleochemical earnings should recover but likely to be more muted and later than earlier expected. However, contribution from BLC should stay decent.

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. We keeping FY25-26F core EPS intact on higher upstream contribution being offset by weaker-than-expected downstream performance.

Valuations. Maintain TP at RM4.30 based on 2.0x PBV or the range for large integrated planters. 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: (a) push to improve upstream productivity - from planting higher yielding materials to pro-active adoption of mechanisation and digitalisation, (b) focus on higher margin specialty products downstream, and (c) long-term ESG efforts such as investments to convert oil palm trunks into net zero palm-based wood products or EFB into high value non-wood environmentally friendly pulp. Over FY25-26, firm upstream earnings are expected to overcome still muted downstream performance. Maintain 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 Nov 2024