IOI’S integrated business portfolio stands group in good stead

KUALA LUMPUR: Analysts are still optimistic about IOI Corp Bhd’s prospects, despite its recent disposal of a 10% stake in sustainable plant-based products firm, Bunge Loders Croklaan Hogeweg (BLC) for about Rm466 mil.

BLC’S earnings contribution is also seen as negligible, given IOI’S large earnings base, said analysts.

The disposal should also see IOI’S equity interest in BLC reduced to 20% from 30%.

Hong Leong Investment Bank (HLIB) Research, which kept a “buy” call on IOI, said the share sale would result in a loss of around Rm50mil per year, which is non-core in nature, as “the bulk of the disposal loss is related to fair value loss arising from de-recognition of the terminated ‘put’ and ‘call’ options.”

“The disposal loss aside, the equity interest reduction in BLC will result in its earnings contribution to IOI by about Rm50mil per annum, based on our estimates, which is insignificant given IOI’S large earnings base,” HLIB Research said in a note to clients.

It maintained its earnings forecast with an unchanged target price (TP) of RM4.36.

Kenanga Research, which has a “market perform” call on IOI said the disposal would cause a small annual dent of 2% to 3% to the group’s core net profit.

Kenanga Research said the disposal gain or loss is “negligible” as the price is close to carrying value and has a fair average disposal price-to-earnings ratio of about 20 times.

“The sale of IOI’S certified palm oil to BLC is also unlikely to be affected,” it added.

If IOI apply the entire proceeds of Rm466 mil to pare down net debt of Rm2.75bil as at March 31, 2022, Kenanga Research noted the group’s net gearing of 26% should fall to 22%.

“As we also expect robust cash flows for the fourth quarter 2022 (4Q22) thanks to firm crude palm oil (CPO) prices, it is unclear whether the group will declare a special dividend following this sell down,” it added.

Pending 4Q22 results later this month, Kenanga Research has maintained its estimated FY22 dividend per share at 13 sen.

“The improving balance sheet will support its expansion plans, though upstream acquisition may be less likely for the next year or so due to high asking prices.

“Downstream expansion is possible, but a slowing global economic outlook may curb such ambition unless rising energy costs and insecurity in the European chemical sector cause major capacity cuts or closures, thus opening expansion possibilities for integrated plantation players such as IOI,” noted Kenanga Research.

The research house said it continues to like IOI’S strong agri-land backed balance sheet, good environmental, social and governance record with a high rating of 81% and exposure to firm CPO, and indirectly energy, prices.

MIDF Research also likes IOI based on its integrated business, where the manufacturing segment is about 35% of the group’s profit, which would help cushion any pullback of average selling price for CPO.

As such, this would reduce earnings volatility, it said, adding that it is maintaining a “buy” call on the stock with a TP of RM6.

Meanwhile, Maybank Investment Bank Research is maintaining a “buy” call on IOI with a TP of RM4.21.

It pointed out: “The key risks to the palm oil sector and IOI are weather anomalies, resulting in poorer-than-expected output growth, lower-than- expected CPO prices achieved as well as negative policies imposed by importing countries.”

Unfriendly policies imposed by Malaysia and Indonesia on the upstream or downstream segments, coupled with lower crude oil prices that makes palm biodiesel demand not viable and weaker competing oil prices were also seen as risks to IOI’S rating, it added.