-  We are upgrading IOI Corporation from HOLD to BUY with a higher RNAV-based fair value of RM6.30/share. Our fair value implies an asset value of RM12bil for the property division and PE of 23x on IOI’s CY14F plantation earnings. We applied a PE of 23x as most of the other plantation companies are currently trading at this valuation or higher.

-  Our BUY recommendation on IOI is premised on the group’s liquidity and share price underperformance. Compared to the other plantation companies, IOI’s share price has underperformed.

-  Since early-November 2013, IOI’s share price has stagnated. IOI has underperformed KLCI by 0.4-percentage points on a 12-month basis.

-  IOI’s corporate transparency is also expected to improve with the listing of IOI Properties, which is supposed to take place in December 2013.

-  IOI’s 1QFY14 core net profit was within our expectations and consensus estimates. IOI’s core net earnings were relatively flat YoY in 1QFY14 as increased manufacturing and property profits mitigated the fall in plantation earnings.

-  Average CPO price shrank by 20.2% from RM2,941/tonne in 1QFY13 to RM2,347/tonne in 1QFY14. FFB production slid 1.6% YoY to 875,835 tonnes in 1QFY14 due to the highbase effect in 1QFY13 when the entire plantation industry recorded a bumper crop.

-  Due to these reasons, plantation operating profit slid 37% from RM377.3mil in 1QFY13 to RM237.6mil in 1QFY14.

-  Positive spots in IOI’s results were the manufacturing and property divisions. Manufacturing operating profit surged by 214.3% YoY to RM208.7mil in 1QFY14 on the back of lower feedstock costs.

-  Property division chalked up a 23.2% YoY increase in operating profit in 1QFY14 underpinned mainly by robust sales of properties in Bandar Putra Kulai and Kempas Utama, Johor.

-  GDV (Gross development value) of Bandar Putra Kulai is estimated at RM464mil in total while Kempas Utama’s GDV is about RM795mil.

-  Share of profits in the property joint ventures rose from RM9.9mil in 1QFY13 to RM23.7mil in 1QFY14 partly due to sales of the Trilinq condominiums at Jalan Lempeng, Singapore. Going forward, IOI might launch the South Beach property project next year. The project, which is estimated to command a GDV of S$3.4bil, would have hotels, office, retail units and service apartments upon completion.

Source: AmeSecurities