Investment Highlights

• Maintain HOLD on IOI Corporation with a lower fair value of RM4.27/share vs. RM4.30/share previously. We have reduced IOI’s FY19F net profit by 6.9% to account for a lower plantation EBIT margin. We have applied a FY19F PE of 25x to arrive at IOI’s fair value of RM4.27/share.

• IOI has declared a gross DPS of 4.5 sen for 4QFY18, which brings total gross DPS to 20.5 sen for FY18. We have forecast a similar gross DPS of 20.5 sen for FY19F, which translates into a yield of 4.5%.

• IOI's FY18 results were below consensus expectations and our estimates mainly due to a 47.4% QoQ drop in plantation EBIT in 4QFY18. We believe that the QoQ plunge in plantation EBIT in 4QFY18 was due to a 2.5% decline in CPO price and a 12.1% decline in FFB production.

• Comparing FY18 against FY17, the group’s core net profit (ex-unrealised forex gains of RM318.3mil and one-off gain of RM1.8bil in respect of the disposal of 70% of Loders Croklaan) edged down by 3.3% to RM910.6mil as stronger manufacturing earnings helped cushion weak plantation profits.

• Plantation EBIT fell by 17.9% from RM1,230.5mil in FY17 to RM1,010.1mil in FY18 dragged by lower CPO and palm kernel prices. Average CPO price slid by 7.8% from RM2,766/tonne in FY17 to RM2,549/tonne in FY18. Average palm kernel price slipped by 16.3% from RM2,691/tonne in FY17 to RM2,252/tonne in FY18.

• IOI's FFB production rose by 11.4% in FY18. Comparing 4QFY18 against 3QFY18 however, IOI's FFB output shrank by 12.1% due to the three-day break for the 14th general election in May and Hari Raya festive period in June.

• On a yearly basis, we estimate that IOI’s manufacturing operating profit after interest expense and interest income (oleochemical and refining) improved from RM158.9mil in FY17 to RM384mil in FY18. This was driven by higher sales volume and improvement in margins of the oleochemical division. IOI’s manufacturing unit recorded a fair value gain on derivative financial instruments of RM0.3mil in FY18 vs. a loss of RM0.8mil in FY17.

• Comparing 4QFY18 against 3QFY18, IOI’s manufacturing EBIT rose from 2.9% to 4.5% as the oleochemical unit benefited from a drop in raw material costs. Manufacturing EBIT climbed from RM64.1mil in 3QFY18 to RM85mil in 4QFY18.

• IOI's net gearing edged up from 26.1% as at end-March to 26.4% as at end-June 2018. About 79.1% of IOI's borrowings were denominated in USD. Its gross cash rose stood at a whopping RM2.4bil as at end-June 2018 due to proceeds from the disposal of Loders Croklaan to Bunge.

Source: AmInvest Research - 20 Aug 2018