IOI to record stable earnings performance in 4Q19
KUCHING: Analysts remain sanguine on IOI Corporation Bhd (IOI) on expectations of stable earnings performance in the fourth quarter of 2019 (4Q19).
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), despite potentially softer upstream plantation performance due to lackluster crude palm oil ( CPO) prices and lower harvesting activities during Ramadan, IOI’s 4Q19 earnings are expected to remain stable from the previous quarter.
“This is largely underpinned by an expected improvement in Oleochemical margins, thanks to cheaper feedstock and stable demand for specialty products (especially those used in the pharmaceutical industry).
“Note that the downstream segment’s profit has already exceeded that of upstream segment’s in 3Q19,” Kenanga Research said.
The research arm noted that management expects improvement in the financial performance of IOI’s 30 per cent-owned specialty fats associate Bunge Loders Croklaan, fueled by higher volume in the confectionary and human nutrition categories as well as the synergies arising from the integration with the larger Bunge set-up.
On IOI’s plantation segment, Kenanga Research highlighted that management has embarked on an aggressive replanting exercise (six to seven per cent of matured areas versus three to four per cent usually), mostly for Sabah estates as most palms in the region has past prime age.
It also highlighted that as a result, the group’s matured hectarage is expected to shrink by 2,000 to 3,000 hectares (ha) in financial year 2020 (FY20) ( net of new Kalimantan areas coming into maturity).
“There should also be minimal new plantings in FY20 as circa 80 per cent of IOI’s remaining unplanted reserves (7,200 ha) has already been planted in FY19 due to favourable weather conditions.
“Overall, management has guided a low single-digit decline in fresh fruit bunch (FFB) production (versus -2 per cent expected for FY19) due to the replanting efforts, which should consequently lead to a four to five per cent increase in CPO’s cost of production (consistent with our assumption).
Nevertheless, the research arm still expected earnings to improve in FY20 as higher CPO price (RM2,100 per metric tonne (MT) versus RM2,047 projected for FY19) masks lower production and heightened cost of production, while Oleochemicals continue to perform well due to stable demand.
“In view of the remarkable the Oleochemical performance, the group continues to plan for further capacity expansion in Prai, Penang.
“The new facility, which is slated to commence construction in December 2019, is expected to increase the group’s existing Oleochemical capacity by 110,000 MT per year (14 per cent of 780,000 MT currently).
However, Kenanga Research had not factored in any earnings contribution from this as construction of the facility is estimated to take two years, and operations are likely starting only in FY22.
“Meanwhile, the group remains on the lookout for brownfield plantation estates, but management notes that attractive deals are difficult to come by as most estate owners are demanding lofty valuations despite low CPO prices.”