Investment Highlights

• Maintain HOLD on IOI Corporation with a lower fair value of RM4.60/share, which is based on a FY19F PE of 25x.

• IOI's 9MFY18 results were below consensus expectations and our estimates. We have reduced IOI's FY18F core net profit by 10% and FY19F net earnings by 6.6% due to weaker manufacturing earnings, a lower CPO price assumption and reclassification of Loders Croklaan from subsidiary to associate. We are now assuming an average CPO price of RM2,500/tonne for FY19F vs. RM2,750/tonne previously.

• IOI’s manufacturing EBIT fell by 50% from RM128.3mil in 2QFY18 to RM64.1mil in 3QFY18 as fair value gains turned into losses. IOI’s fair value changes in derivatives swung from a gain of RM66.1mil in 2QFY18 to a loss of RM7.2mil in 3QFY18. Manufacturing EBIT margin was 2.9% in 3QFY18 vs. 5.5% in 2QFY18.

• Excluding the fair value changes, IOI’s manufacturing EBIT would have improved by 14.6% QoQ to RM71.3mil in 3QFY18. IOI said that the profit improvement was underpinned by higher earnings from merchandising activities.

• IOI completed the disposal of 70% of Loders Croklaan to Bunge for US$595mil and €303.4mil, on 1 March 2018. Following the disposal, IOI only holds 30% of Loders Croklaan vs. 100% previously. Loders Croklaan is involved in the manufacturing of specialty fats.

• IOI's core net profit (ex-net unrealised forex gains of RM426.6mil) rose by 10.1% YoY to RM785.2mil in 9MFY18 underpinned mainly by a lower effective tax rate and a 5% rise in manufacturing EBIT (refining and oleochemical manufacturing). Effective tax rate was 18.6% in 9MFY18 vs. 41.0% in 9MFY17 as forex translation gains are not taxable.

• Plantation EBIT fell by 8.2% YoY to RM884.8mil in 9MFY18 dragged by lower CPO and palm kernel prices. Average CPO price shrank by 5.8% from RM2,753/tonne in 9MFY17 to RM2,593/tonne in 9MFY18 while average palm kernel price plunged from RM2,875/tonne to RM2,376/tonne.

• IOI's FFB production rose by 16.9% YoY in 9MFY18. Comparing 3QFY18 against 2QFY18, IOI's FFB output slid by 14.7% due to the low productivity season.

• IOI's net gearing stood at 26.1% as at end-March 2018 vs. 69.0% as at end-December 2017. About 80.7% of IOI's borrowings were denominated in USD. IOI's gross cash rose from RM1,547.6mil as at end-December 2017 to RM3,739.1mil as at end-March 2018 due to the disposal of Loders Croklaan to Bunge.

Source: AmInvest Research - 17 May 2018