Investment Highlights

• We maintain our HOLD recommendation on IOI Corporation with a lower fair value of RM4.20/share (vs. RM4.40/share previously). Our fair value for IOI is based on an FY20F PE of 27x. We have reduced IOI’s FY20F net profit by 4.4% to account for a lower plantation EBIT margin.

• IOI has declared a final gross DPS of 4.5 sen for 4QFY19, which brings total gross DPS to 8 sen for FY19 (FY18: 20.5 sen). We have forecast a gross DPS of 8 sen for FY20F, which translates into a yield of 1.9%.

• IOI’s FY19 core results (ex-net forex loss of RM102.1mil) was 11.4% below our earnings forecast and 10.4% short of consensus estimates. IOI’s net profit in 4QFY19 fell short of expectations due to a 27.2% QoQ decline in manufacturing EBIT (ex-associates and fair value changes).

• The manufacturing division was affected by lower refining margins in 4QFY19. We think that refining accounts for 30% to 40% of manufacturing EBIT while oleochemical makes up the balance 60% to 70%. Due to weaker refining margins, manufacturing EBIT margin edged down to 6.3% in 4QFY19 from 7.9% in 3QFY19.

• Comparing FY19 against FY18 however, the manufacturing division performed well on the back of lower cost of raw materials. Manufacturing EBIT surged by 26.4% to RM79.3mil in FY19 from RM34.0mil in FY18. EBIT margin improved to 6.2% in FY19 from 4.1% in FY18.

• Unsurprisingly, the plantation division was affected by weak CPO prices in FY19. Average CPO price realised slid by 20.6% to RM2,025/tonne in FY19 from RM2,549/tonne in FY18. FFB production slipped by 3.3% in FY19.

• Net gearing stood at 24.3% as at end-June 2019 compared with 26.9% as at end-March. About 78.6% of IOI's RM4.86bil gross borrowings were denominated in USD. IOI's gross cash reserves stood at RM2.6bil as at end-June 2019.

• IOI said that its performance in FY20F would be satisfactory. The group expects CPO prices to recover gradually in FY20F as palm inventories decline. IOI also expects its oleochemical division to perform well in FY20F underpinned by low feedstock costs. The risk is an increasingly challenging operating environment resulting from the global economic slowdown.

Source: AmInvest Research - 16 Aug 2019