IOI Corp likely to sustain FY20 oleochemical earnings

TheEdge Fri, Oct 11, 2019 11:07am - 4 years View Original


IOI Corp Bhd
(Oct 10, RM4.22)
Maintain hold with an unchanged fair value of RM4.20:
IOI Corp Bhd is currently trading at a forecast financial year ending June 2020 (FY20F) price-earnings ratio (PER) of 30.6 times (x) versus Kuala Lumpur Kepong Bhd’s FY20F (ending September) PER of 26.5x and Sime Darby Plantation Bhd’s FY20F (ending December) PER of 38.1x. We reduce IOI’s FY20F net profit by 11.4% to account for a weaker plantation earnings before interest and tax (Ebit) margin resulting from higher production costs.

 
We understand that the weather in IOI’s oil palm estates in Kalimantan has been dry in the past two months. There have also been no hotspots or fires in IOI’s estates in Indonesia. On the other hand, rainfall in IOI’s oil palm estates in Sabah is still decent.

We believe that its oleochemical unit would continue to sustain its earnings for FY20. However, there is a risk that refining margins may ease. Hence, we forecast IOI’s manufacturing Ebit (refining and oleochemical) to inch down by 2.5% for FY20. We assume a manufacturing Ebit margin of 6.3% in FY20 versus 6.6% in FY19. About 30% to 40% of IOI’s manufacturing Ebit came from its refining segment for FY19.

IOI’s oleochemical earnings are expected to be underpinned by low feedstock costs. As more than half of IOI’s oleochemical products are sold to high-value-added industries such as pharmaceuticals, their selling prices are not as volatile as those in the basic fatty acid segment.

As for its upstream division, we expect IOI’s fresh fruit bunch (FFB) production to be flat in FY20, compared to a 3.3% decline in FY19. IOI’s FFB output growth is not expected to be exciting as the size of mature areas is envisaged to fall due to replanting of about 10,000ha to 11,000ha in Malaysia. IOI’s FFB production grew by 17.8% year-on-year in the first two months of FY20.

IOI is still on the lookout for acquisitive opportunities. We believe that the group has until March 2020 to make acquisitions using the RM959.9 million proceeds from the disposal of Loders Croklaan.

If there is none, IOI would decide whether to extend the timeline for investments or return the cash to shareholders in the form of dividends. The cash of RM959.9 million would translate into a gross dividend per share (DPS) of 15 sen. Currently, we forecast a gross DPS of eight sen for IOI for FY20, which translates into a yield of 1.9%. — AmInvestment Bank, Oct 10

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