-  Maintain BUY on IOI Corporation, with an unchanged fair value of RM5.15/share based on an FY15F PE of 23x. We have raised IOI’s FY14F earnings forecast by 3% to account for an improved manufacturing EBIT margin.

-  Although IOI is more expensive than its 31.4%-owned associate, Bumitama Agri Ltd (BAL), IOI is a more liquid exposure to BAL.

-  IOI’s average daily traded volume was 8mil shares in the past three months versus BAL’s 0.5mil. IOI has been slowly increasing its shareholding in BAL since late last year. BAL accounted for 3.5% of IOI’s pre-tax profit in 1HFY14.

-  We also expect IOI to maintain FY13’s gross DPS of 15.5 sen for FY14F. This implies a yield of 3.2% and net payout of 73%.

-  We understand that IOI intends to keep its Syariah compliant status. Hence, we reckon that the group would be restructuring its borrowings before the deadline of November 2014. Currently, most of IOI’s RM7.8bil borrowings are conventional instruments.

-  We believe that IOI would still be the look-out for plantation landbank after spending almost RM1bil t  acquire Unico-Desa Plantations Bhd last year. We reckon that the group is eyeing places like Indonesia and Papua New Guinea. However, Africa is not on IOI’s radar yet.

-  We envisage specialty fats and oleochemical to drive IOI’s manufacturing earnings in FY14F. We believe that oleochemical margins would remain intact for now due to the cost of feedstock locked-in when prices were low. However, if palm kernel oil prices continue to rise and selling prices start to soften due to competition from glycerin, then oleochemical margins may be squeezed.

-  Loders Croklaan, which carries out IOI’s specialty fats activities, is expected to continue to perform well, underpinned by growing demand.

-  A growing number of cities in the US have banned transfats from being used in restaurants. Palm-based cocoa butter substitutes are healthier than trans-fats, which may cause heart diseases.

-  Loders Croklaan is one of the major manufacturers of specialty fats in the world. Its competitors are Fuji Oil and AAK, which is based in Sweden.

Source: AmeSecurities