Highest return on equity over three years, Highest growth in profit after tax over three years: Plantation: IOI Corp Bhd - On strong footing despite market headwinds

This article first appeared in The Edge Malaysia Weekly, on December 14, 2020 - December 20, 2020.
Highest return on equity over three years, Highest growth in profit after tax over three years: Plantation: IOI Corp Bhd - On strong footing despite market headwinds
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Founded by the late Tan Sri Lee Shin Cheng, IOI Corp Bhd remains the leading player in the plantation industry, which has been battered by weak palm product prices in recent years and slowdown in economic activity.

Despite its three-year compound annual growth rate for profit after tax being only 0.1%, IOI Corp’s performance beat its peers.

It raked in a net profit of RM631.7 million for the financial year ended June 30, 2019 (FY2019), compared with RM3.06 billion in FY2018, due to the absence of a one-off divestment gain.

Net profit came in at RM629.7 million in FY2016 and RM743.2 million in FY2017.

Return on equity (ROE) rose from 10.2% in FY2017 to 36.8% in FY2018, but fell to 6.8% in FY2019, giving it a three-year ROE of 16.5%.

During the period under review, IOI Corp’s share price traded range bound between RM4.17 and RM4.88. The stock, however, has risen 28%, from its low in March this year.

For FY2020, it reported a net profit of RM600.9 million, down 4.9%, mainly attributed to lower contribution from the resource-based manufacturing segment and higher net foreign currency translation loss on foreign currency-denominated borrowings and deposits of RM207.9 million, which was mitigated by higher contribution from the plantation segment.

As at end-June, 2020, it had a low net gearing ratio of 0.29 times, with cash and cash equivalents standing at RM2.3 billion.

IOI Corp’s plantation business covers Malaysia and Indonesia while the downstream resource-based manufacturing business includes refining of palm oil as well as manufacturing of oleochemical and specialty oils and fats, with a strong presence in Asia, Europe and the US.

The group expects oil palm crop production to increase gradually from September to November this year, while demand is forecast to taper off from the high restocking activity in the major importing countries, according to its 2020 annual report. “Therefore, we foresee that the palm oil price may decline slightly towards the end of this year from its current strong level.”

IOI Corp registered total fresh fruit bunches (FFB) production of 3.1 million metric tonnes (MT) in FY2020, lower than the 3.4 million MT in FY2019.

FFB yield came in at 21.24 MT per hectare compared with 23 MT per hectare in the previous year. The lower FFB yield was primarily caused by the ongoing acceleration in replanting activities in the Sabah region, unfavourable dry weather and the Movement Control Order restrictions due to the Covid-19 pandemic.

Despite the decrease in the total FFB production output by 8.9%, its operations recorded a higher oil extraction rate of 21.83% compared with 21.44% in FY2019 due to high-yielding planting materials that boost oil yields and productivity.

Its overall average crude palm oil price realised for FY2020 is higher at RM2,314 per MT against RM2,025 per MT in FY2019.

The group is currently embarking on a five-year plan that aims to raise plantation oil yield by at least 15% through utilising high-yielding planting materials; reducing dependency on manual labour and optimising workers’ productivity; diversifying planting of crops away from full reliance on oil palm to other crops such as coconut and kenaf; as well as increasing the oleochemical sub-segment’s profit contribution by RM100 million through organic expansion and new product applications.

In an Aug 26 note, HLIB Research raised IOI Corp’s FY2021-22 core net profit forecasts by 12.5% and 11.2%, mainly to account for higher earnings assumptions at its manufacturing segment and plantation associate. Its rating was upgraded to “hold”, with a higher target price of RM4.38. Last month, the research house raised its target price to RM4.42.

PublicInvest Research, meanwhile, retained a “neutral” call on the group with an unchanged target price of RM4.70, following the release of IOI Corp’s first-quarter results last month. It noted that the stronger results were mainly due to encouraging earnings growth in upstream plantation despite a sharp decline in resource-based earnings.