Investment Highlights

• We are maintaining our HOLD recommendation on IOI Corporation with an unchanged fair value of RM4.60/share. Our fair value for IOI is based on an FY20F PE of 27x.

• IOI’s 1HFY19 core results (ex-net forex loss of RM83.9mil) were 10% below our forecast and 12% short of consensus estimates. We have reduced IOI’s FY19F net profit by 6.5% to account for weaker plantation earnings.

• Like the other plantation companies, IOI was affected by the recent plunge in CPO price. Unlike other planters however, IOI was hit by a YoY drop in FFB production in 1HFY19.

• As a result, plantation EBIT (excluding associates) fell by 65.4% to RM208.8mil in 1HFY19 from RM603.9mil in 1HFY18. EBIT margin dived to 24.8% in 1HFY19 from 46.8% in 1HFY18.

• Average CPO price realised slid by 21.5% to RM2,081/tonne in 1HFY19 from RM2,650/tonne in 1HFY18. IOI’s FFB production shrank by 10% YoY in 1HFY19.

• On a positive note, the manufacturing division performed well in 1HFY19. Manufacturing EBIT margin rose to 5.3% in 1HFY19 from 4.1% in 1HFY18.

• Manufacturing EBIT (excluding associates and fair value changees) improved by 7.2% to RM193.9mil in 1HFY19 from RM180.9mil in 1HFY18 on the back of increased sales volume and margins in the oleochemical segment. On a reported basis, manufacturing EBIT included fair value gains on derivative financial contracts of RM38mil in 1HFY19 vs. RM44.6mil in 1HFY18.

• Loders Croklaan performed well in 1HFY19. IOI’s share of net profit in Loders rose to RM38.3mil in 1HFY19 from RM10.9mil in 1HFY18.

• On a quarterly basis, manufacturing EBIT (excluding associates) rose by 11.9% to RM102.4mil in 2QFY19 underpinned by higher sales volume and margins from the refining segment. Manufacturing EBIT margin was 5.6% in 2QFY19 vs. 5.0% in 1QFY19.

• In the results announcement, IOI said that its 3QFY19 plantation results will improve QoQ due to the recovery in CPO price. This will offset the QoQ fall in FFB production in 3QFY19. IOI also expects its oleochemical segment to perform well in 3QFY19.

• Net gearing slid to 29.5% as at end-December 2018 from 38.9% as at end-September. About 97.9% of IOI's RM5.2bil gross borrowings are denominated in USD. IOI's gross cash reserves remained healthy at RM2.5bil as at endDecember 2018.

Source: AmInvest Research - 21 Feb 2019