PETALING JAYA: IOI Corp Bhd got off to a strong start, with a core net profit of RM618.5mil in the first quarter of the financial year 2023 (1Q23), up 4.6% quarter-on-quarter (q-o-q) and 43.3% year-on-year.
Analysts, however, generally warned of softer quarterly earnings ahead for the group as crude palm oil (CPO) is likely to undergo further price corrections.
According to Kenanga Research, IOI’s 1Q23 core net profit came in at 31% and 41% of its full year forecast and the full year consensus estimate, respectively.
“We consider the results below expectations as a strong average CPO price of RM4,496 per tonne is unlikely to be repeated during the remaining quarters of the financial year 2023 (FY23),” the research house said in a note to clients yesterday.
While CPO prices have corrected sharply since 2Q22 on recovering edible oil supply, Kenanga Research said the supply and demand balance in 2023 still looks fragile.
The group’s resource-based earnings are more susceptible to slower demand arising from the prospects of global economic headwinds, while its European downstream units are enduring rising energy costs and may even encounter supply disruptions, the research house pointed out.
“Therefore, despite enjoying good margins, better pricing power with lower input palm oil prices, we expect weaker q-o-q contributions ahead,” said Kenanga Research.
Despite maintaining a “market perform” call on IOI, the research house has lowered slightly the target price (TP) to RM4 from RM4.10 previously.
It noted IOI’s strong downstream operations and Europe’s current energy woes may benefit the group over time, even if there is some temporary setback to its operations there.
Hence, some downstream expansions outside Europe or mergers and acquisitions (M&As) cannot be ruled out.
CGS-CIMB Research, meanwhile, described IOI’s 1Q23 results as broadly in line with its outlook, as “we expect weaker earnings in the second half of 2023 due largely to lower CPO prices and higher production costs.”
However, this will be partly cushioned by the improved productivity at the group’s estates following the return of foreign workers and the delayed peak production cycle for its young palm trees, CGS-CIMB Research noted.
Overall, the research house projected IOI’s FY23 core net profit to decline 27% due to lower CPO prices.
CGS-CIMB Research also reiterated a “hold” call on the stock with a TP of RM4.24 as it trades close to its target price.
The key upsides are higher CPO prices and earnings-accretive M&As, while the downside risks are lower fresh fruit bunch yields and weaker downstream margins.