Investment Highlights

• Maintain HOLD on IOI Corporation with a lower fair value of RM4.60/share (vs. RM4.65/share previously). We have reduced IOI's FY18F net profit forecast by 2.7%. Although we have raised our average CPO price assumption to RM2,700/tonne from RM2,600/tonne, this has been offset by a weaker manufacturing EBIT margin. Our fair value for IOI implies a FY18F PE of 25x.

• IOI's FY17 core net profit (ex-forex loss of RM298.8mil) was below our expectations and consensus estimates mainly due to a 54.6% QoQ drop in manufacturing EBIT in 4QFY17. Manufacturing EBIT was affected by a net fair value loss on derivative financial instruments of RM44.6mil in 4QFY17 vs. a net gain of RM54.5mil in 3QFY17. About RM29.9mil of the fair value loss were in respect of forward foreign exchange contracts while another RM22.5mil were related to cross currency swap contracts.

• In the results announcement, IOI said that the performance of the oleochemical segment is improving due to lower feedstock prices. The fall in feedstock prices is expected to continue in the next few months. Also, performance of the specialty fats segment is envisaged to be satisfactory due to the higher business volume from multinational customers. The US market is anticipated to be attractive due to the potential ban on trans-fats in June 2018.

• IOI's core net profit (ex-unrealised forex loss of RM298.8mil) rose by 8.8% YoY to RM1.0bil in FY17 mainly on the back of a 30.4% increase in plantation EBIT. Manufacturing EBIT fell by 47.5% YoY to RM318.5mil in FY17 dragged by net fair value losses on derivatives of RM70.3mil. In contrast, IOI recognised net fair value gains on derivatives of RM120.9mil in FY16.

• Excluding the net fair value changes, IOI's manufacturing EBIT would have been lower by 20% in FY17 due to lower refining margins.

• Excluding the fair value loss of RM44.6mil in 4QFY17, IOI's manufacturing EBIT would have risen from RM19.8mil in 3QFY17 to RM78.3mil in 4QFY17. This was due to higher sales volume and margins in the oleochemical and refining segments.

• Plantation EBIT expanded by 30.4% YoY to RM1.2bil in FY17 underpinned by a higher CPO price. Average realised CPO price was RM2,766/tonne in FY17 against RM2,249/tonne in FY16. FFB production was flat in FY17. EBIT margin of the plantation division rose from 48.5% in FY16 to 52.6% in FY17.

• IOI's net gearing eased from 86.3% as at end-March to 78.1% as at end-June 2017 on the back of a stronger MYR. About 76.4% of IOI's borrowings were denominated in USD. Gross borrowings amounted to RM7.3bil as at end-June 2017 vs. RM7.38bil a year ago.

Source: AmInvest Research - 29 Aug 2017