In the wake of an analysts briefing recently, RHB Research said the company’s downstream earnings would likely more than make up for the shortfall in the upstream segment.
A lower crude palm oil (CPO) price environment and a decline in the fresh fruit bunches (FFB) output are among the challenges the company faces now.
RHB Research noted that IOI Corp had cut its FFB production to “flattish” in the 2023 financial yer (FY23) from a single-digit increase year-on-year (y-o-y).
The company recorded a 4% drop in FFB output in the fourth month of FY23.
“While the tight labour situation has eased to 10%, normalisation of output would not be realised until at least three months later given the time needed to train newly hired workers before they are deployed,” said RHB Research in a research note today.
It added that IOI Corp’s new 110,000-tonne fatty acid plant, which was commissioned in January 2023, has increased its existing capacity by 15%.
At IOI Corp’s 20% associate Bunge Loders Croklaan, RHB Research said there were also ongoing expansions in the form of a new refinery and specialty fats plant in the Netherlands, which will cost US$500 million (RM2.23 billion).
The plant is expected to begin running in 2024.
“These should provide the next engine of volume growth for the company’s downstream division,” said RHB Research, adding that it maintained a “buy” call on IOI Corp, with an unchanged target price (TP) of RM4.55. It is also not making earnings changes.
The research outfit added that IOI Corp’s refinery unit has been experiencing negative margins following the reinstatement of Indonesia’s levy in mid-November 2022, as Indonesian refiners now have the upper hand given the more advantageous tax structure.
Meanwhile, Public Investment Bank said IOI Corp expects CPO prices to remain above RM4,000 per tonne for the next couple of months, supported by the tight supplies from Indonesia.
The investment bank also noted that IOI Corp’s downstream manufacturing segment is expected to remain steady, led by improved refining margins despite weaker margins seen for the oleochemical sub-segment.
Due to the small replanting size carried out in FY2022 amid the high CPO prices, Public Investment Bank said IOI Corp’s management plans to carry out aggressive replanting activities of about 8% to 9% of the planted area.
“It plans to replant 8,000ha in FY2023 and 10,000ha in FY2024. Management also shared that replanting cost has significantly increased from RM15,000 per tonne at the pre-pandemic level to RM19,000 per tonne.
“In addition, it has a backlog of 40% in manuring and upkeep which needs to be resolved,” it said.
IOI Corp’s management has allocated a higher capital expenditure of RM500 million for FY2023, mainly for the upstream plantation and new oleochemical capacity.
Public Investment Bank maintained a “neutral” call on IOI Corp with a TP of RM4.24.