This article first appeared in The Edge Financial Daily on December 19, 2019

IOI Corp Bhd
(Dec 17, RM4.64)
Maintain market perform with an unchanged target price of RM4.45: We believe IOI Corp Bhd’s second financial quarter ending Dec 31, 2019 (2QFY20) should capture a portion of the crude palm oil (CPO) rally (our estimate: about RM2,300 per tonne) due to forward sales (typically one month ahead), while the full impact should be seen in 3QFY20. For its downstream division, 2QFY20 margins should remain stable on lower feedstock prices, while slight margin compression is expected, starting from 3QFY20, should CPO prices remain at the current level. Nevertheless, higher CPO prices bode well for IOI Corp as potential upstream margin expansion overshadows potential downstream margin compression. Furthermore, the management expects an improvement in its 30%-owned specialty fats associate Bunge Loders, targeting a contribution of RM50 million to RM60 million (versus FY19: RM45 million) on the back of a wider customer base and a better product mix arising from synergies with the larger Bunge group.

The group has allocated RM500 million for FY20 capital expenditure (downstream: RM200 million), earmarking about RM100 million for further capacity expansion in Prai, Penang. The new facility is expected to increase the group’s existing oleochemical capacity by 110,000 tonnes per year (versus 780,000 tonnes currently). However, we have yet to factor in any earnings contribution from this as completion is estimated to be in FY22. Meanwhile, the group remains on the lookout for brownfield plantation estates, but the management has noted that attractive deals are difficult to come by as most estate owners are demanding lofty valuations. As such, the group is likely to seek from its shareholders an extension of one year to the initial deadline of March 2020 for the utilisation of about RM960 million from the disposal of a 70% equity interest in Loders.

We make no change to our FY20-FY21 core net profit (CNP) estimates of RM947 million-RM1.07 billion as the updates were consistent with expectations. We highlight here that our FY20-FY21 CNP estimates are 7%-9% higher than the consensus’ which appear conservative.

While FY20 should spell out a better year for IOI Corp due to stronger upstream and solid downstream divisions, at the current price level the group appears fully valued at a calendar year 2020 price-earnings ratio of 28.3 times. — Kenanga Research, Dec 17