-  We are downgrading IOI Corporation from BUY to HOLD with an unchanged fair value of RM5.15/share. Our fair value of RM5.15/share is roughly based on an FY15F PE of 23x.

-  IOI’s annualised core 9MFY14 results were below consensus estimates but in line with our earnings forecast.

-  In spite of higher CPO price, IOI’s net earnings declined from 2QFY14 to 3QFY14 due to lower contribution from the manufacturing and plantation divisions.

-  IOI said that its manufacturing division experienced lower refining and oleochemical margins in 3QFY14 due to an increase in cost of feedstock.

-  Profit margin of the manufacturing division slid from 9.1% in 2QFY14 to 7.3% in 3QFY14. Manufacturing earnings fell by 21% from RM259.8mil in 2QFY14 to RM205.2mil in 3QFY14.

-  On a YoY basis however, the unit’s earnings climbed 44.2% to RM683.6mil in 9MFY14 due to improved margins from oleochemical, refining, and specialty fats segments. We believe that each of these sub-segments contribute equally to the manufacturing division’s profits.

-  Plantation profit edged down by 1.1% QoQ to RM306.8mil in 3QFY14 as a fall in FFB production could not be compensated by higher CPO price.

-  FFB production sagged by 23% QoQ to 781,504 tonnes in 3QFY14 due to unfavourable weather. Average CPO price realised rose by 7.3% from RM2,425/tonne in 2QFY14 to RM2,602/tonne in 3QFY14.

-  On a YoY basis, plantation earnings contracted by 4.1% to RM876.6mil in 9MFY14 due to lower FFB production and higher replanting expense. IOI’s FFB production declined by 1.3% YoY in 9MFY14.

-  IOI achieved an average CPO price of RM2,459/tonne in 9MFY14 versus RM2,470/tonne realised in 9MFY13.

-  We believe that IOI’s oil palm estates in Indonesia are starting to bear fruits. Assuming mature areas of 5,900ha and an average FFB yield of 7 tonnes per ha, we reckon that the plantation unit in Indonesia could be recording FFB production of more than 41,000 tonnes in FY14F. 

Source: AmeSecurities