Investment Highlights

• We maintain our HOLD recommendation on IOI Corporation with a lower fair value of RM4.40/share (vs. RM4.60/share previously). Our fair value for IOI is based on an FY20F PE of 27x.

• We have reduced IOI’s FY20F net profit by 3.8% to account for a lower average CPO price assumption of RM2,200/tonne compared with RM2,300/tonne previously.

• IOI’s 9MFY19 core results (ex-net forex loss of RM26.7mil) were 5.8% below our forecast and 9.2% short of consensus estimates. We have revised IOI’s FY19F net profit downwards by 6.3% to account for a weaker CPO price of RM2,100/tonne vs. RM2,200/tonne originally and a lower plantation EBIT margin.

• IOI’s 9MFY19 core net profit was affected by the plunge in palm product prices and a higher effective tax rate. IOI’s effective tax rate surged to 27.9% in 9MFY19 from 18.6% in 9MFY18 due to a revision in the real property gains tax. We do not know the details of IOI’s real property gains tax and as such, we would be checking with management soon.

• On a positive note, the manufacturing division performed well in 9MFY19 as reflected in the 35.4% YoY rise in EBIT (ex-associates and fair value changes). We believe that IOI’s manufacturing division benefited from a lower cost of feedstock in 9MFY19. EBIT margin of the manufacturing division (ex-associates and fair value changes) rose to 6.2% in 9MFY19 from 3.7% in 9MFY18.

• Comparing 3QFY19 against 2QFY19, manufacturing EBIT increased by 42.0% to RM145.4mil from RM102.4mil. EBIT margin was a high 7.9% in 3QFY19 vs. 5.6% in 2QFY19.

• Plantation EBIT (excluding associates and fair value changes) plummeted by 60.4% to RM322.4mil in 9MFY19 from RM813.6mil in 9MFY18. Average CPO price realised eased by 21.4% to RM2,039/tonne in 9MFY19 from RM2,593/tonne in 9MFY18. FFB production declined by 5.8% YoY in 9MFY19.

• In its results announcement, IOI said that its plantation division is expected to perform below average in 4QFY19. However, the oleochemical unit is envisaged to perform well in 4QFY19 on the back of positive demand and lower raw material costs.

• Net gearing stood at 26.9% as at end-March 2019 compared with 29.5% as at end-December 2018. About 78.4% of IOI's RM4.8bil gross borrowings were denominated in USD. IOI's gross cash reserves were a high RM2.3bil as at end-March 2019.

Source: AmInvest Research - 23 May 2019