IOI: Diversified Plan Supports Palm Oil Producer Amid Sector Headwinds

A recent investment bank briefing has reaffirmed confidence in the upstream growth prospects of a major palm oil producer, despite ongoing weaknesses observed in its resource-based manufacturing (RBM) segment. The company is maintaining its focus on operational efficiencies and strategic diversification to navigate current market dynamics.

Performance Review

The company’s upstream division is poised for growth, with Fresh Fruit Bunch (FFB) production projected to increase by 5-10% year-on-year in FY26. This anticipated growth is underpinned by diligent estate upkeep, enhanced mechanization, successful catch-up fertilizer programs in Indonesia, and the increasing contribution from maturing young palms. Significant improvements in land-to-man ratios are also on track across its Peninsular Malaysia, Sabah, and Indonesian operations. Cost discipline remains a cornerstone of its strategy, with Crude Palm Oil (CPO) production costs holding steady at RM2,032/MT, and FFB costs expected to ease in FY26 from RM308/MT in FY25 due to improved productivity. Overall, FFB production is forecast to grow at a Compound Annual Growth Rate (CAGR) of 4% from 2.84 million MT in FY25 to 3.15 million MT by FY28E.

Strategic Diversification

Management continues its commitment to a coconut plantation strategy, having already planted 3,800 hectares and targeting 5,000 hectares by FY27. This initiative is expected to yield approximately twice the profitability per hectare compared to oil palm, positioning the company as a leading Malaysian coconut producer once full maturity is achieved.

Resource-Based Manufacturing Under Pressure

Conversely, the RBM segment faced significant headwinds, reporting a RM43.5 million loss in 4QFY25, excluding derivative adjustments. This was primarily driven by margin compression across its refinery, oleochemical, and other sub-segments. The company highlighted persistent challenges, including cheaper feedstock benefiting Indonesian refiners, which has resulted in pricing pressure and delayed margin recovery. Management remains cautious on the near-term recovery of RBM earnings, targeting a modest 1.0-1.5% margin, though the segment is currently operating at negative margins due to intense competition. An upside is expected when demand for RBM products improves in FY26. Separately, the palm wood business recorded losses of approximately RM18 million in FY25 and total impairments of about RM39 million. No significant new capital expenditure is planned for this segment, with the focus instead on reducing wastage and improving plant utilization. Long-term prospects for palm wood remain intact, supported by tightening global wood supply and potential price recovery.

Outlook and Recommendation

The investment bank maintains a HOLD rating for the company, with an unchanged 12-month target price of RM3.84. This valuation is based on 20x CY26E Price-to-Earnings, aligning with the company’s 5-year historical mean. While upstream recovery and coconut expansion provide a strong foundation for long-term earnings, caution persists regarding near-term RBM performance. Key risks include prolonged RBM margin pressure, weaker-than-expected production and palm prices, and potential regulatory hurdles affecting exports.