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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 15 Nov 2019, 10:29 AM

 

IOI Corporation Berhad - Downstream Loses Steam

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IOICORP’s 4Q19 CNP* came in below expectations at RM125m (-19% YoY; -39% QoQ), bringing FY19 CNP to RM761m (-21% YoY), which accounted for 94% of consensus full-year estimate and only 87% of ours. The disappointment stemmed from lower-than-expected FFB output. A dividend of 4.5 sen was proposed, bringing FY19 total dividend to 8.0 sen, slightly above our 7.0 sen forecast. Trim FY20E CNP by 6% to RM944m and we introduce FY21E CNP of RM964m. Maintain MP with a lower TP of RM4.10.

Below expectations. IOI Corporation (IOICORP)’s 4Q19 core net profit (CNP*) came in below expectations at RM125m (-19% YoY; -39% QoQ), bringing FY19 CNP to RM761m (-21% YoY). The full-year CNP accounted for 94% of consensus full-year estimate and only 87% of ours. The disappointment stemmed from lower-than-expected FFB output of 3.40m MT vs. our 3.59m MT forecast. A final dividend of 4.5 sen was proposed, bringing FY19 total dividend to 8.0 sen, slightly above our 7.0 sen forecast.

Downstream lost steam. YoY, FY19 CNP fell 21% as Plantation profit plummeted 64% on the back of a 10% decline in the average CPO price to RM2,025/MT, exacerbated by a 3% dip in FFB output. This was partially offset by a 13% improvement in Downstream profit, thanks to cheaper feedstock, higher sales volume and higher share of associate results from Bunge Loders Croklaan Group B.V. (Loders). QoQ, despite a marginal improvement in the average CPO price (+1%), Plantation profit fell 36% on the back of an 11% drop in FFB output. Additionally, Downstream posted a 55% plunge in profit as refining margins waned from high bases in previous quarters. Overall, these led to a drastic 39% drop in 4Q19 group CNP.

Better year ahead. Moving into FY20, management anticipates CPO price to recover as demand from China and India picks up, while rising biodiesel uptake in Malaysia and Indonesia continues to absorb supply. In addition, the group expects FFB production to improve slightly in FY20 with sturdy output from young Indonesian palms offsetting the temporary loss in Sabah due to aggressive replanting efforts recently. We concur with management’s views, forecasting CPO price to improve 4% to RM2,100/MT and FFB output to grow marginally by 1% to 3.43m MT in FY20.

Trim FY20E CNP by 6% to RM944m after lowering Downstream EBIT margin assumption from 7.0% to 6.0% to be conservative; and we introduce FY21E CNP of RM964m based on flat CPO price forecast of RM2,100/MT and FFB output of 3.50m MT (+2%).

Maintain MARKET PERFORM with a lower Target Price of RM4.10 (previously RM4.35) based on an unchanged Fwd. PER of 27.2x (- 1.0SD) but a lower CY20E EPS of 15.2 sen post-earnings adjustment. Despite unexciting CPO prices, IOICORP’s earnings should remain relatively stable thanks to its solid Downstream. At the current level, IOICORP appears fully valued at CY20E PER of 26.3x (-0.5SD).

Risks to our call are sharp rises and falls in CPO prices and a precipitous rise/fall in fertiliser/labour/transportation costs.

Source: Kenanga Research - 16 Aug 2019

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