This article first appeared in The Edge Financial Daily on October 24, 2017

IOI Corp Bhd
(Oct 23, RM4.43)
Maintain neutral with a higher target price (TP) of RM4.65: We had a chat with representatives of IOI Corp Bhd last week and came away with some positive developments in the company, most important of which is its plans to expand its plantation land bank after completing the disposal of the specialty oils and fats business to Bunge Ltd by the end of 2018. 

The group is striving to achieve an 8% fresh fruit bunch (FFB) production growth in its financial year ending June 30, 2018 (FY18), banking on improved FFB production yield. It has 149,714ha of mature plantation area and about 24,682ha or 14% of its total plantation area are still immature. Close to 91% of its total plantation area is located in Malaysia. Its average age profile is about 14 years (Malaysia: 15 years, Indonesia: four years). The young age profile of its Indonesian plantation suggests that it is in the early stages of break-even.

The IOI Corp management has maintained its capital expenditure (capex) allocation of RM400 million to RM450 million despite the deconsolidation of the specialty oils and fats segment. Sixty per cent of its FY18 capex is for new planting activities of 4,000ha in Indonesia while the remaining 40% would be the normal upgrades for its downstream segment. Besides that, it also plans to replant up to 9,000ha in Indonesia.

IOI Corp expects to see a lower all-in cash crude palm oil (CPO) cost of production of RM1,450 per tonne in FY18 (against RM1,500 per tonne in FY17), mainly supported by improved FFB yield. Given the steady palm oil prices, upstream plantation earnings are expected to improve. Downstream earnings margin are also likely to improve.

After being quiet in the upstream plantation segment over the last couple of years, the IOI Corp management plans to expand its land bank in Malaysia with a target of 60,000ha, particularly in brownfield areas in Peninsular Malaysia and Sabah.

Following the uplift of the Roundtable of Sustainable Palm Oil suspension in August last year, the majority of its clients have resumed contracts with the group. Recently, one of the leading certified refined palm oil consumers, Unilever, announced that it has now resumed sourcing palm oil from IOI Corp. — PublicInvest Research, Oct 23