IOI Corporation Expanding its downstream operation

News  In a Bursa announcement, IOICORP announced that it had invested USD85m to set up IOI (Xiamen) Edible Oils (“IXEO”) in China. We gather that IXEO is a wholly owned subsidiary of IOICORP and it has been given green light to operate in China. In our view, the main feedstock for IXEO should be palm oil (instead of other edible oils such as soybean oil or rapeseed oil) as IOICORP has a significant production of palm oil from its upstream operation in Malaysia

Comments  We are neutral on the news.   While we believe that the margin for palm oil downstream processing should improve in view of the low input cost (crude palm oil prices) and stable output prices (cooking oil) in China, the earnings impact should be minimal for FY13E-FY14E as it may take up to 2 years for IXEO to build and commission its refineries in China.

As of end-Jun, IOICORP owns four palm oil refineries with a total annual refining capacity of 3.3m mt. Three of these refineries are located in Malaysia and another one is in Netherlands.

Outlook We believe FY13E earnings should decline 5% YoY due to the lower earnings from its plantation division (upstream operation). Note that this division contributed 61% of IOICORP’s EBIT in FY12. We have assumed a lower average CPO price estimate of RM2850 (-2% YoY) with limited FFB growth prospect for FY13E.

Forecast No changes to our FY13E-FY14E earnings of RM1.74b-RM1.76b.

Rating Maintain UNDERPERFORM Low CPO prices and matured oil palm trees should keep IOICORP’s plantation division earnings unexciting for FY13E.  

Valuation  Maintaining our TP of RM4.40 based on FY13E PER of 16.2x (which is its 3-year average PER).  

Risks Better than expected CPO prices. Better than expected margin for the property and downstream divisions.

Source: Kenanga