KUALA LUMPUR: Despite the labour challenges facing its production, IOI Corp Bhd still offers decent value, thanks to its profitable downstream operations and efforts to cushion worker shortages.
Notably, the plantation sector has been plagued by a severe shortage in labour amidst the travel restrictions, which has weighed heavily on production.
IOI Corp saw its fresh fruit bunches (FFB) output drop by 7.6% to 1.52 million tonnes in the first half of financial year 2022 (FY’22), dragged mainly by the aggravating labour shortfall.
According to Hong Leong Investment Bank Research (HLIB), the shortfall has worsened to 15%-20% from 9%-15% a few months ago.
Consequently, for the full FY’22, management is guiding a flattish to slightly negative FFB output growth as worker shortage persists.
However, the plantation group is stepping up mechanisation efforts to mitigate the labour shortage, including mechanising its fertilising and pesticide spraying, as well as automating mill operations.
This should reduce its dependency on labour by 25% over the longer term.
On the other hand, IOI Corp’s downstream businesses are expected to remain profitable, at least in the near term, as higher feedstock and freight costs will be mitigated by its relentless effort to improve cost efficiency and productivity.
The group is also looking at growth in its specialty business, HLIB said.
The research house also noted that IOI Corp has locked in its fertiliser requirement for the second half of financial year 2022 (H2FY’22), which will help the group control its cost.
Note that the blended price for fertiliser has increased by about 10% year-on-year, which would result in its crude palm oil (CPO) production cost going up by some 3%-4% in FY22 from about RM1,500 per tonne in FY21.
“We understand that IOI Corp is in the midst of securing its H1FY’23 fertiliser supply, which blended price is expected to rise by more than 30% versus its FY’22 blended price,” HLIB said.
The brokerage has maintained its “buy” call on the stock with an unchanged target price of RM4.35, based on unchanged 24 times 2023 earnings per share of 18.1 sen.
“We like IOI Corp for its decent share liquidity, strong balance sheet with net gearing of 0.25 times as at Sept 30, 2021, and decent valuation.”
HLIB also opined that the prosperity tax announced under Budget 2022 would have a minimal impact on the group as its upstream operations – which is the main earning contributor to IOI Corp and accounted for over 90% of IOI Corp’s profit before interest and tax in Q1FY’22 – is split over 30 subsidiaries.
During the first quarter ended Sept 30, 2021, IOI Corp posted a net profit of RM277.6mil on the back of RM3.63bil in revenue. HLIB maintained its financial forecasts on the company for now, pending the release of its Q2FY’22 performance on Feb 23, 2022.
“Based on our estimates, every RM100 per tonne increase in our CPO price assumption will lift our FY22-23 core earnings forecasts by 3%-4%.”