This article first appeared in The Edge Financial Daily, on September 23, 2015.

IOI Corp Bhd
(Sept 22, RM3.95)
Maintain neutral with an unchanged target price (TP) of RM4.07: We had a meeting with IOI Corp Bhd’s management last week and came away with some positive news. Despite the current weak crude palm oil prices, the company was least affected, thanks to its exposure to the downstream segment.

However, given the current unattractive valuations, we continue to maintain our “neutral” call with an unchanged sum-of-parts-based TP.

Excluding the effects of El Nino, the management is projecting a 5% to 7% fresh fruit bunch production growth for financial year 2016 (FY16). The group’s age profile is about 13 years old (Malaysia: 13 years old; Indonesia: five years old). It still has about 8,000 unplanted land banks in Indonesia, which will be completed by next year.

The company has come out with new palm oil seedlings, which could potentially bump up its current oil extraction rate from 22% to 27%. Currently, about 20,000ha have been planted with the new seedlings. The group will gradually replant about 6,000ha to 8,000ha per annum in Malaysia with the new seedlings.

Based on the latest audited results, excluding Islamic debt, its total debt over total assets was about 30%, which would enable the group to qualify for the syariah-compliant list again.

The management guided about RM350 million capital expenditure for FY16, which would be mainly used for infrastructure and new planting activities. The construction of a 100,000-tonne specialty oils and fats plant in Xiamen, China, has commenced and will be ready by June 2016.

On the cost structure, it expects to maintain its current cost of production of RM1,200 per tonne, and the fertiliser cost for the first half of FY16 has been locked in since the beginning of this year.

The group is looking for land bank opportunities in Indonesia, given that it will complete its new planting activities in the country by next year. Apart from that, it is also trying to search for strategic tie-ups with local players in South America and Russia for downstream ventures. — PublicInvest Research, Sept 22