Softer downstream outlook for IOI Corp

PETALING JAYA: Analysts are trimming conglomerate IOI Corp Bhd’s earnings for financial year 2024 (FY24) and FY25 due to, among others, softer downstream margins.

Kenanga Research said it is cutting its FY24 to FY25 forecasts core net profit by 5% and 8%, respectively, to adjust for a softer downstream outlook.

The research house said downside risks to its call for IOI Corp include western hostility towards palm oil on sustainability and bio-diversity issues, impact of weather and labour shortages on production, weak crude palm oil (CPO) and palm kernel prices, as well as cost inflation, particularly fertilisers.

“We expect its upstream margins to improve on firm CPO prices while cost pressure stays easier than a year ago and downstream headwinds abate.

“We maintain our average CPO price assumption of RM3,800 per tonne in calendar year 2024 (CY24) on modest global edible oil supply increase against demand growth of 3% to 4%.”

The research house said global inventory is set to decline from a year ago – which will be tighter but still manageable.

“Meanwhile, fuel and fertiliser costs are now 10% to 30% lower year-on-year (y-o-y) while fresh fruit bunch output has risen along with palm kernel (PK) prices.

“A byproduct when milling CPO, PK sales are used to offset CPO cost so good PK prices help to contain CPO cost and PK prices have started picking up after softening since mid-CY22.”

Focusing more on specialty and customised products, the research house said IOI’s resource-based downstream enjoy better pricing and margins.

“However, the refining operation continues to face intense competition and tight margins while its operations in Europe are enduring weak demand, rising wages and energy supply pressures. All in all, more meaningful improvement in downstream manufacturing is more likely in FY25,” it noted.

For the third quarter ended March 31, 2024 (3Q24), IOI’s net profit dropped 37.6% y-o-y to RM123.1mil or earnings per share (EPS) of 1.98 sen as revenue fell 7% y-o-y to RM2.46bil. For the nine months ended March, the group posted a net profit of RM762.5mil or EPS of 12.29 sen on revenue of RM7.06bil.

Hong Leong Investment Bank (HLIB) Research said it is lowering its FY24 to FY25 core net profit forecasts by 5.6% and 2.2%, mainly to account for lower FFB output, lower manufacturing margin and higher finance cost assumptions.

“The anticipated earnings improvement for the plantation segment in 4Q24 arising from seasonal production cycle, continuing labour productivity improvement and higher oil extraction rate and decent performance at special fats sub-segment will at least partly mitigate the challenging outlook at oleochemical and refining sub-segments (arising from stiff competition from Indonesian refiners, weak global economic environment and rising geopolitical tensions),” it said.

Meanwhile, TA Research said it is tweaking its FY25 earnings forecast by 8.2% to account for lower contribution from the manufacturing division. Meanwhile, the brokerage is also introducing its FY26 earnings forecast of RM1.4bil (an increase of 2.4% y-o-y).