This article first appeared in The Edge Financial Daily on January 30, 2020

IOI Corp Bhd
(Jan 29, RM4.52)
Maintain hold with an unchanged fair value (FV) of RM4.30: Our “hold” recommendation on IOI Corp Bhd is kept with an unchanged FV of RM4.30 a share. Our FV for IOI Corp is based on the forecast financial year ending June 30, 2021 (FY21F) price-earnings of 27 times.

Despite a decline in new plantings in FY21F, we do not think IOI Corp’s capital expenditure (capex) would fall in the long term, because the group may be stepping up its replanting of ageing oil palm trees and expanding its oleochemical capacity in Penang.

After completing 3,600ha of new plantings in Indonesia in FY20F, IOI Corp would not have any remaining plantable land. We believe its land bank acquisition has been slow as prices are high. As at end-June 2019, IOI Corp had planted 176,156ha in Indonesia and Malaysia.

IOI Corp is planning to replant about 11,000ha of ageing oil palm trees in FY20 versus 8,000ha in FY19.

Also, the group is planning to construct a RM220 million oleochemical plant in Penang, expected to increase IOI Corp’s production capacity by 110,000 tonnes per year to 890,000 tonnes per year.

We assumed a capex of RM500 million for IOI Corp for FY20 compared with RM395.7 million for FY19. Free cash flows are estimated at 10.3 sen per share in FY20 and 14.1 sen per share in FY21, versus 13 sen per share in FY19.

Although IOI Corp’s capex is not expected to fall, we believe there is potential for higher dividends. IOI Corp has not used proceeds of RM959.9 million — translating into 15 sen per share — from the disposal of Loders Croklaan for acquisitions. We believe IOI Corp will decide on using the proceeds in March 2020.

Operationally, we assumed IOI Corp’s fresh fruit bunch (FFB) production would be flat in FY20. Its FFB output declined 5.7% year-on-year in the first half of financial year ending June 30, 2020.

We do not envisage its FFB output to grow in FY20. IOI Corp was affected by the haze in Malaysia in the third quarter of 2019 and a decline in mature areas resulting from the replanting of ageing oil palm trees.

We forecast its manufacturing earnings before interest and tax (Ebit) to ease 7% for FY20 as high feedstock costs may erode operating profit margin. We assumed a manufacturing Ebit margin of 6% for FY20 versus 6.6% for FY19. — AmInvestment Bank, Jan 29