Investment Highlights

• We are downgrading IOI Corporation from BUY to HOLD with a lower fair value of RM4.60/share. In spite of the fall in CPO price, IOI has out-performed the KLCI by 3.7- percentage points on a three-month basis and 5.4- percentage points on a six-month basis. Our fair value for IOI is based on an FY20F PE of 27x.

• We have reduced IOI’s FY19F net profit by 11.9% and FY20F net profit by 9.2%. The downward revision in IOI’s FY19F earnings is due to a lower CPO price assumption of RM2,300/tonne (vs. RM2,450/tonne previously) and weaker plantation EBIT margin. IOI’s 1QFY19 results were below our expectations and consensus estimates.

• In the results announcement, IOI said that CPO prices will trade between RM2,000/tonne and RM2,250/tonne until the beginning of year 2019F. IOI expects its financial performance in 2QFY19 to be slightly lower than 1QFY19 due to the softer CPO price. IOI’s CPO production in 2QFY19 is expected to be higher than 1QFY19. IOI also anticipates its oleochemical segment to perform well in 2QFY19 on the back of a lower palm kernel price and steady demand for oleochemical products.

• We forecast IOI’s gross DPS at 8.5 sen for FY19F. IOI’s dividend payments are expected to normalise in FY19F after the payment of the special gross DPS of 11.5 sen in FY18 from the disposal proceeds of Loders Croklaan.

• IOI's core net profit (ex-unrealised forex changes) fell by 24.9% from RM272.8mil in 1QFY18 to RM204.9mil in 1QFY19. This was mainly due to a 51.1% decline in plantation EBIT. The plantation division was affected by the slump in palm product prices and CPO production.

• Average CPO price slid by 14.7% from RM2,645/tonne in 1QFY18 to RM2,255/tonne in 1QFY19. Average palm kernel price eased by 22.4% from RM2,284/tonne in 1QFY18 to RM1,773/tonne in 1QFY19. IOI’s FFB production shrank by 18.0% YoY in 1QFY19.

• Manufacturing EBIT expanded by 10.0% from RM101.5mil in 1QFY18 to RM111.7mil in 1QFY19 on the back of fair value gains on derivative financial contracts. Fair value changes swung from a loss of RM21.5mil in 1QFY18 to a gain of RM20.2mil in 1QFY19. EBIT margin of the oleochemical unit was 6.1% in 1QFY19 vs. 4.70% in 1QFY18. Apart from the fair value gain, we believe that the oleochemical unit benefited from lower cost of feedstock and improved sales volume in 1QFY19.

• IOI's net gearing rose from 26.4% as at end-June to 38.9% as at end-September 2018. All of IOI's RM5.3bil borrowings are denominated in USD. IOI's gross cash fell from RM2.8bil as at end-June to RM2.5bil as at end-September 2018 due to repayment of borrowings and payment of dividends.

Source: AmInvest Research - 13 Nov 2018