IOI’s downstream margins expected to remain high

PETALING JAYA: IOI Corp Bhd’s downstream margins are expected to remain higher than historical levels as downstream expansion continues.

Although analysts expect the downstream division to be relatively weaker in the second half of financial year 2023 (2H23), they said its contribution to earnings would still be firm, possibly beyond financial year 2024.

RHB Research said IOI’s refinery unit has been experiencing negative margins following the reinstatement of Indonesia’s levy mid-Nov 2022, as Indonesian refiners now have the upper hand given the more advantageous tax structure.

“Oleochemical margin, on other hand, has been very strong (overall downstream margins in 1H23: 8.2% versus 3.6% in 1H22) but is expected to moderate. Nevertheless, management expects oleochemical margin to remain at 20% to 30% above the historical levels in 2H23.

“Post-analyst briefing, we continue to see the value in IOI’s integrated business, with its downstream earnings helping to support the weaker upstream earnings during a lower crude palm oil price environment,” it said.

IOI is involved in the business of cultivation and processing of palm oil and rubber plantation products.

RHB Research said the downstream ongoing expansions should provide the next engine of volume growth for the company’s downstream division.

The group’s new 110k tonne fatty acid plant, which was commissioned in January 2023, increased its existing capacity by 15%. At its 20% associate Bunge Loders Croklaan, there are also ongoing expansions in the form of a new refinery and specialty fats plant in the Netherlands which will cost US$500mil (RM2.24bil), which will begin running in 2024.

The research house is maintaining its “buy” call on IOI with an unchanged target price of RM4.55.

Kenanga Research, which maintains a “market perform” call on the stock, said: “We are keeping our palm oil price, production cost as well as fruit output estimates intact even though there is concern over the impact of ongoing floods in Johor on fresh fruit bunch production.

“The guidance for weaker downstream earnings in 2H23 is also not surprising either given the unusually strong performance in 1H23. Post-results, our estimate is still 8% above consensus but a smaller difference compared to a 12% gap previously.”Meanwhile, Hong Leong Investment Bank Research said IOI’s performance would likely weaken in the second half versus its first half, due to weaker refining margin and competitiveness reinstatement of palm oil export levy in Indonesia since January 2023.

However, it said management remains optimistic that performance at the segment would still remain decent, on the back of stable energy costs, improved uptake from China, sustained demand from the European market (despite the weak economic situation there), and its strong position in the international oleochemical market.

For the second quarter ended Dec 31,2022, (2Q22), IOI chalked up a higher net profit of RM712.1mil compared with RM494.7mil a year ago. Revenue for the period stood at RM3.3bil against RM4.112bil previously.

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