Report Date and Broker Information
Date: October 28, 2024
Broker: UOB Kay Hian
Company Overview
IOI Corporation, listed with the Bloomberg ticker “IOI MK,” is an integrated palm oil player primarily involved in upstream and downstream palm oil activities. The company is categorized under the Consumer Staples sector and holds a significant market presence with a capitalization of RM24,632.5 million (US$5,565.9 million). IOI operates extensively in Malaysia, aligning with national industry trends.
Share Price and Target Price
- Current Share Price: RM3.76
- Target Price: RM3.60 (maintained)
- Upside Potential: -4.3%
- The “Hold” recommendation is maintained based on current performance projections and strategic considerations.
Recent Performance Highlights
- In 4QFY24, IOI Corporation achieved an adjusted core net profit of RM376.8 million.
- For 1QFY25, earnings are projected to rise, estimated between RM400 million to RM420 million, reflecting a 6%-11% quarter-on-quarter increase, largely attributed to increased Fresh Fruit Bunch (FFB) output.
Production and Operational Insights
- 1QFY25 Production Outlook: The company anticipates a sequentially stronger quarter due to its plantation segment’s seasonal ramp-up, particularly in FFB output, which is expected to rise by approximately 18% quarter-on-quarter.
- Monthly Trends: Despite a positive overall trend, monthly production growth showed signs of slowing by September 2024. For instance, monthly output grew by 8% in July and 12.5% in August but slowed to 5% in September.
- Annual Comparison: FFB output rose by 8% and 5.5% year-over-year in July and August, respectively, but declined by 1.6% in September, mirroring the broader industry pattern in Malaysia.
Downstream Segment and Margin Projections
The downstream segment’s performance in 1QFY25 is expected to remain stable, with ongoing margin pressure likely to continue. While a slight annual improvement to 2.5% operating margins is anticipated for the year, a more substantial margin recovery is forecasted for 2HFY25, driven by demand normalization.
Pricing Trends and Earnings Impact
- Crude Palm Oil (CPO) Prices: A rise in CPO prices to around RM4,600 per tonne (up from a 1QFY25 average of RM4,000 per tonne) is expected to support future earnings, even as output may decline slightly in 2QFY25.
- Palm Kernel Prices: Rising prices for palm kernel in recent months should further contribute to IOI’s upstream profitability.
Impact of Malaysia’s Budget 2025 on Operations
The recent Budget 2025 announcement, which includes a minimum wage increase from RM1,500 to RM1,700 per month, is expected to have a limited impact on IOI’s financials. The company has gradually aligned wages with anticipated policy shifts, reducing potential wage-related cost impacts. Adjustments in the export duty and windfall profit levy may introduce a minor increase in expenses per tonne of CPO; however, these could be offset by cost efficiencies in IOI’s downstream operations.
Financial Projections and Key Assumptions
- Revenue Growth: Forecasted turnover growth is 10.6% for FY25, followed by 5.8% in FY26 and 5.2% in FY27.
- Net Profit Projections: For FY25, adjusted net profit is anticipated to reach RM1,320.9 million, with further growth in FY26 and FY27.
- EBITDA and Operating Profit: For FY25, EBITDA is projected at RM1,878 million, and operating profit at RM1,460 million. Margins are expected to stabilize over the medium term as cost pressures ease.
Valuation and Investment Recommendation
IOI Corporation’s target price is maintained at RM3.60 with a “Hold” rating. The valuation framework involves a price-to-earnings (PE) ratio of 17x FY25 for the plantation division and 15x FY25 for resources-based manufacturing, along with an 18x multiple for contributions from Loders. The valuation also considers the 32% stake in Bumitama Agri at a fair value of S$0.70 per share.
Environmental, Social, and Governance (ESG) Highlights
- Environmental: The majority of IOI’s Malaysian estates are MSPO-certified, and 96% are RSPO-certified. IOI proactively maintains transparent practices to address and cooperate with U.S. Customs and Border Protection in potential investigations.
- Social: IOI Corporation engages in community enrichment initiatives encompassing health, education, and medical assistance, and maintains transparency in handling community-related cases.
- Governance: Governance practices include an Anti-Bribery and Anti-Corruption Policy, underscoring IOI’s commitment to ethical standards.
This comprehensive report highlights IOI Corporation’s steady performance and strategic adjustments amid evolving market and regulatory landscapes.
