IOICORP: Upstream Strength Drives Earnings Beat, Target Price Raised
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
A leading plantation-based conglomerate reported first-half fiscal year 2026 (1HFY26) earnings that were in line with internal projections but notably surpassed Street expectations. This robust performance was primarily underpinned by stellar upstream segment profits, benefiting from elevated crude palm oil (CPO) prices and significant cost efficiencies.
Performance Review
The company’s fresh fruit bunch (FFB) output saw substantial growth, rising 12% quarter-on-quarter (QoQ) and 14% year-on-year (YoY) in 2QFY26, contributing to an 8% FFB output growth for 1HFY26. This performance exceeded both the institution’s 3.9% projection and management’s guidance of 3-5% growth for FY26F, with growth further accelerating to 9.5% YoY in 7MFY26.
Despite a 2% YoY dip in CPO average selling price (ASP) to MYR4,198/tonne in 1HFY26, palm kernel (PK) prices saw a healthy 13% YoY increase. Crucially, unit costs demonstrated a positive trend, declining 4% QoQ in 2QFY26 to approximately MYR1,754/tonne, marking a 9% YoY reduction. For 1HFY26, unit costs were down 7% YoY, significantly outperforming initial forecasts of a 3-5% YoY rise, mainly due to improved productivity offsetting higher fertiliser costs. Management expects unit costs to remain relatively flat for the full fiscal year.
Conversely, the downstream division, while remaining profitable in 2QFY26, experienced a moderation in EBIT margins to 0.3% from 2.9% in the preceding quarter. This was attributed to a challenging operating environment characterized by subdued customer sentiment, global trade policy uncertainties, geopolitical tensions, elevated inventory levels, and intense competition from Indonesian producers. However, short-term festive demand and strong contributions from its specialty fats associate, which saw a 23% QoQ PBT growth in 2QFY26, provided some offset.
Future Outlook
Looking ahead, upstream earnings are anticipated to continue their strong trajectory in the second half of the fiscal year, supported by sustained elevated CPO prices. While the downstream segment is expected to face ongoing challenges, potential offsets from short-term festive demand and specialty fats associate contributions are noted. The institution maintains its FFB growth assumptions, pending further clarification. Minor adjustments to forecasts have been made concerning foreign exchange assumptions, export and levy duties in Indonesia, and the latest net debt figures.
Investment Recommendation
The investment bank reiterates a recommendation, with a revised Sum-of-Parts (SOP)-based target price of MYR4.85, up from MYR4.75. This new target price implies a 21% upside potential and an approximate 3% FY26F yield. The valuation is considered attractive at 17x 2026F P/E, placing it at the lower end of its peer range.
