IOICORP: Strategic Pivot to High-Value Products Amidst Challenging Downstream
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
Public Investment Bank highlights management’s strategic shift towards enhancing its focus on high-margin, value-added CPO products. This move is designed to buffer the impact of negative margins in the refining segment and the inherent volatility of CPO prices. While the upstream plantation segment is expected to continue performing well, the overall downstream outlook remains challenging. The investment bank maintains a “Neutral” rating with an unchanged SOP-based target price of RM4.18.
Performance and Strategic Initiatives
The company is targeting a 5-8% fresh fruit bunch (FFB) production growth for FY26F, following an 8% uptick observed in 1HFY26. Despite an anticipated seasonal drop in February, a 10% rebound is expected in March. Fertilizer application has reached 60% of the target for 1HFY26, and replanting efforts are on track to cover a wider area of 10,000ha this year.
Production costs are projected to decrease by RM200/mt in FY26, driven by improved FFB yield, better oil extraction rates (OER) performance, and a 3-5% year-on-year decline in fertiliser costs. A core strategy involves penetrating high-value-added CPO products, including low-contaminant refined CPO, RSPO-certified CPO (with a USD35-40/mt premium), organic CPO (USD400-500/mt premium), and Mineral Oil Saturated Hydrocarbons products.
Downstream Segment Developments
The downstream segment demonstrated significant improvement in 1HFY26, largely attributed to robust performance from oleochemicals in 1QFY26, which benefited from a sharp decline in PKO prices. Looking ahead, while challenges persist in both the refinery and oleochemical segments, incremental earnings contributions are anticipated from its 20%-owned specialty fats associate, Bunge Loders Croklaan. This follows the completion of a second new plant in New Orleans, expected to add 5-10% year-on-year for various specialty fats, and maiden contributions from a new state-of-the-art plant in Amsterdam, with Phase 1 completion slated for September 2026.
New Ventures and Future Outlook
In terms of new ventures, the group plans to expand its coconut plantation from 3,000ha to 5,000ha. Construction of a coconut oil mill complex in Segamat is set to begin this year, with commissioning targeted for 2028. This facility will have an initial processing capacity of 100,000 coconuts/day, with plans to scale up to 200,000. This venture is estimated to contribute RM50-60 million Pre-tax Profit (PBT) annually. However, other new ventures such as JV-owned paper pulp and palm wood projects are expected to contribute only by 2028.
