IOI management recently mentioned in a meeting with analysts that the company could see flattish production growth for financial year 2017 (FY17), and a better recovery outlook in FY18-19E.
KUCHING: Analysts are maintaining their positive outlook on IOI Corporation Bhd (IOI) on the back of better production and recovering downstream performance.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), IOI management recently mentioned in a meeting with analysts that the company could see flattish production growth for financial year 2017 (FY17), and a better recovery outlook in FY18-19E.
Kenanga Research’s estimates were more optimistic in the near term at seven per cent for FY17.
Based on the first nine months of 2017 (9M17) production growth of nine per cent year on year (y-o-y), the research arm thought this was achievable.
“We think the company’s monthly production patterns, coming in at over 20 per cent y-o-y growth, indicate that production is well on track to normalise by FY18 or earlier,” it said.
As production recovers, Kenanga Research expects better economies of scale leading to lower production cost per ton.
The research arm estimated that all-in production cost, including depreciation, came in at circa RM1,700 per metric tonne (MT) in FY16, compressing upstream margins.
With a better production outlook, it estimated cost per ton to decline by circa 15 to five per cent in FY17-18, for better upstream margins.
Kenanga Research gathered that the crude palm oil (CPO) price rally in the second to third quarter of 2017 (2Q-3Q17) has led to higher input cost for the downstream segment, which dampens the outlook for the segment in the coming quarter.
However, with the uplifting of IOI’s Roundtable on Sustainable Palm Oil (RSPO) suspension, the research arm observed some buyers gradually resuming contact with the company, including traders such as Bunge Limited, which noted that the group is again an eligible supplier to the group since end-February 2017.
“IOI’s increased commitments to sustainability, including targeting the new RSPO Next certification, should soothe investor sentiment and gradually see some recovery from the reputational damage from its previous suspension.
“Meanwhile, the recent pull-back in CPO prices, while limiting upstream segment margins, should benefit the downstream in terms of lower costs, which bodes well for the segment in 4Q17,” the research arm said.
Kenanga Research noted that IOI has circa 20,000 to 30,000 hectares (ha) unplanted area remaining in Indonesia, making up circa 10 to 15 per cent of the group’s gross plantation land bank.
“This is generally in line with other big cap planters, but well below the sector average of circa 25 per cent unplanted land bank against the total area,” it observed.
With rival planters such as Kuala Lumpur Kepong Bhd (KLK), making moves to acquire land banks, the research arm believed IOI should be actively doing the same, though it understood that management remains focused on regional area (Malaysia and Indonesia) as these areas are closer to their existing production zones.
Overall, Kenanga Research maintained FY17-18E core net profit (CNP) estimates at RM1.09 billion to RM1.34 billion as production outlook remained in line with its expectations.
Kenanga Research also reiterated ‘outperform’ on IOI with an unchanged target price of RM5.15 per share.
“We think IOI remains a laggard amongst other big caps, despite the resolution of its sustainability issues and improving production and cost outlook,” the research arm opined.