KUALA LUMPUR: IOI Corp Bhd's downstream segment should improve sequentially on the back of higher sales volume, backloaded by Movement Control Order (MCO) and China demand, thus improving its margin in the fourth quarter (Q4) ending June 30, 2020.

Kenanga Investment Bank Bhd said IOI Corp's sales volume for soap noodles and glycerin (used in toiletries and hand sanitisers manufacturing) were higher in Q4, following heightened personal hygiene measures due to Covid-19.

"Lower feedstock prices from lower crude palm oil (CPO) prices should have resulted in margin improvements.

"For its upstream division, lower CPO prices should offset the recovery in fresh fruit bunches (FFB) output spiked 37 per cent quarter-on-quarter (QoQ)," Kenanga IB analyst Adrian Kok said in a report today.

The firm remained "neutral" on IOI Corp's near-term prospects as FFB growth in the year ending June 30, 2020 was guided at 3.0 per cent to 5.0 per cent with production cost remaining between RM1,500 to 1,600 per tonne and higher replanting cost offsetting higher FFB.

"The low single-digit FFB growth is due to IOI Corp's aggressive replanting exercise plan for FY21 of 12,000 hectares compared to FY20 8,000 ha, mainly in its Sabah estates, which we believe account for about 62 per cent of the group's production.

"Growth is expected to be driven by Peninsular estates about 25 per cent of production) recovering from the dry weather impact, and Indonesian estates (about 10 per cent of production) with young age profile of five years."

Its FY20 FFB output registered about 10 per cent year-on-year (YoY) decline and predicted 2020's CPO price should hover at RM2,300 to 2,400 per tonne.

Kok said IOI Corp's FY20 production cost was expected to creep up between RM1,500 and 1,600 per tonne due to lower FFB output, while FY21 production cost should remain similar as higher replanting cost was negated by improvement in FFB output.

"We believe the group has locked in more than 50 per cent fertiliser requirements for FY21 at a level similar to FY20."

Kenanga IB recommended "market perform" for IOI Corp with unchanged target price of RM4.25 with price-to-earnings ratio at 29.5 times.

"Inventory levels are expected to rise in the coming months as production enters peak season, which should exert pressure on CPO prices."

Meanwhile, Kenanga IB said IOI Corp had about RM960 million war chest (from the disposal of 70 per cent stake in Loders) for acquisitions and remains on the lookout for brownfield plantation estates - with preference towards Malaysian estates.

"However, attractive deals are difficult to come by as most estate owners are demanding lofty valuations. That said, with an extended deadline (September 2021) for the utilisation of the proceeds, we believe there is a possibility for a deal to manifest in FY21."

The group allocated RM500 million for FY21 capital expenditure and earmarked about RM100 million for further capacity expansion in Prai, Penang.

"The new facility is expected to increase the group's existing Oleochemical capacity by 110,000 tonne per year. However, we have yet to factor in any earnings contribution as the completion is projected to be only in mid-FY22," the firm said.