Looking For Organic Growth

Post disposal of Loders, management is looking for opportunities to acquire new landbank to further expand its upstream and downstream operations which mainly focus on the palm-based industry. However, there is no attractive deal on hand now. For 11MFY18, FFB production was 3.3m tonnes, on track to meet our expectations of 3.5m tonnes (+12% yoy). 4QFY18 results are likely to be weaker qoq and yoy on softer CPO ASP. Maintain SELL. Target price: RM3.70.

WHAT’S NEW

• Strategy after disposal of Loders. IOI Corporation (IOI) had transferred 70% of its equity interest in Loders Croklaan Group (Loders) on 1 Mar 18. The sales proceeds will be utilised for repayment of borrowings (50%), working capital (29.75%), dividends (20%) and disposal expenses (0.25%). Post disposal, management targets to focus on:
• Upstream operation. IOI plans to plant 8,000ha of new areas in the next three years, bringing total planted landbank to 29,000ha. Management is also actively looking for opportunity to acquire new landbank to further expand its upstream. Post disposal of Loders, 50% of the sales proceeds would be utilised for repayment of bank borrowings. Its net gearing ratio improved to 0.32x from 0.78x as of Jun 17 which strengthens its balance sheet position and provides IOI room to leverage if there is suitable landbank. However, we understand that the acquisition of new landbank might not be easy due to the strict new planting policy, stringent sustainability regulation and high land prices.
• Downstream operation. Management is also looking to expand its downstream operation through joint venture or merger & acquisition, which will mainly focus on the palm-based industry. However, there is no attractive deal on hand currently.
• Sustainability within IOI’s businesses. The Sustainable Palm Oil Policy (SPOP) is the main guiding document for IOI’s sustainability practices, which was first launched in Mar 14 and revised in Aug 16. A few measures have been taken by IOI to ensure the sustainability of palm oil production and sourcing. IOI is committed to apply the newly revised High Carbon Stock Approach (HCSA) methodology. Moreover, the another key area that IOI is enhancing its effort is Human Rights and Workplace which includes no recruitment fees charged to workers, payment of monthly minimum wage in accordance with the current labour regulations and access of trade unions to workers.

STOCK IMPACT

• Expect weaker qoq and yoy results for 4QFY18. We reckon 4QFY18 results are likely to be weaker qoq and yoy. The weaker results qoq could due to lower FFB production and weaker average CPO prices, while the weaker yoy results would largely be due to weaker average CPO price despite FFB production could be flat or marginally higher yoy.
• FFB production on track to meet our expectations. For 11MFY18, FFB production was 3.3m tonnes (+14.7% yoy), on track to meet our expectations of 3.5m tonnes (+12% yoy) for FY18. We expect Jun 18 FFB production is likely to come in weaker mom on lesser harvesting days due to the Hari Raya holidays in mid-June. Every 1% increase in FFB production growth would increase our FY18 net profit forecast by 1.4%.
• FFB production likely to be weaker qoq, but could be flat or marginally higher yoy. Apr-May 18 FFB production was 545,682 tonnes, while Jun 18 FFB production is most likely to come in weaker mom due to lesser harvesting days on the Hari Raya holidays. As such, 4QFY18 FFB production is likely to be weaker qoq, but could be flat of marginally higher yoy (3QFY18: 866,790 tonnes, 4QFY17: 799,779 tonnes).
• Average CPO price weaker qoq and yoy. The average CPO price was RM2,373/tonne, down 3.8% qoq and 13.4% yoy for 2Q18. The weakening of CPO prices could be due to concerns over palm oil supply outweighing the demand and leading to an increase in palm oil inventory.
• Performance of resources-based manufacturing has stabilised. The performance of downstream operations has ٛ stabilised for the past three quarters with the disposal of its stake in Loders to Bunge. Meanwhile, the group’s oleochemical segment is expected to improve as global and regional economies continue to grow steadily.
• Loders contribution. Following the completion of the disposal, IOI holds a 30% associate stake in Loders. The disposal exercise could improve Loders’ market presence by tapping on Bunge’s geographical presence in regions that IOI currently does not have. This will help to increase sales in Loders in the longer term. Moreover, partnering with Bunge will give IOI better access to other softoil markets. Thus, Loders contribution could double from the current contribution in 5 years’ time.

EARNINGS REVISION/RISK

• Maintain FY18-20 earnings estimates. We forecast EPS of 16.8 sen, 20.1 sen and 21.1 sen for FY18-20 respectively.

VALUATION/RECOMMENDATION

• Maintain SELL with a higher SOTP-based target price of RM3.70 (from RM3.60) as we include the contribution from its 30% stake in Loders which we value at 15x 2019F PE (same as for the manufacturing division). We value its plantation division at 18x 2019F PE, its resources-based manufacturing division at 15x 2019F PE and a fair value estimate of S$0.80/share for its 31% stake in Bumitama Agri. Our target price implies 18x FY19F PE, or -1SD of 5-year mean PE, in line with sector peers’ valuation (ascribed PE of -1SD of 5-year mean) due to the weak CPO price outlook for 2018.
• Share price has fallen 7.4% from high of RM4.86 on 14 May 18, reflecting its weak quarterly earnings. Despite the recent decline, the stock is still trading at a rich 27x FY18F PE, which is +0.5SD of 5-year mean.

SHARE PRICE CATALYST

• Higher-than-expected FFB production growth.
• Better-than-expected contribution from the oleochemicals segment.

Source: UOB Kay Hian Research - 4 Jul 2018