-  Maintain HOLD on IOI Corporation with an unchanged fair value of RM5.15/share. Our fair value of RM5.15/share is roughly based on an FY15F PE of 25x.

-  IOI’s core FY14 results were below consensus estimates and our earnings forecast mainly due to a 49.5% QoQ fall in manufacturing earnings in 4QFY14. We have reduced IOI’s FY15F earnings forecast by 7.8% to account for weaker-than-expected manufacturing EBIT margin.

-  Refining margin declined in 4QFY14, which affected the performance of the manufacturing unit. Profit margin of the manufacturing division shrank from 7.3% in 3QFY14 to 3.8% in 4QFY14.

-  Comparing FY14 against FY13, manufacturing earnings improved by 30.5% from RM603.5mil to RM787.3mil. About 80% of the unit’s profits came from the specialty fats and oleochemical segments while refining accounted for the balance 20%.

-  IOI’s specialty fats plant in Xiamen, China is expected to be commissioned in January 2016. The production capacity of the plant is estimated to be more than 200,000 tonnes per year. Construction cost is envisaged at RM300mil.

-  Plantation profits expanded 10.5% YoY to RM1.2bil in FY14 underpinned by higher CPO price and production.

-  Average CPO price realised strengthened by 3.1% from RM2,433/tonne in FY13 to RM2,509/tonne in FY14. On a QoQ basis, average CPO price realised inched up 2.3% from RM2,602/tonne in 3QFY14 to RM2,661/tonne in 4QFY14.

-  IOI recorded a FFB production growth of 2.9% in FY14. Average FFB yield was 24.0 tonnes/ha in FY14 vs. 24.5 tonnes/ha in FY13. Comparing 4QFY14 against 3QFY14, IOI’s FFB output increased by 5.8% to 827,036 tonnes.

-  IOI’s net gearing stood at 57.2% as at end-June 2014. Total borrowings were RM7.5bil while cash and cash equivalents were RM4.1bil.

-  IOI’s RM1.5bil or US$476.4mil guaranteed notes are due for redemption on 16 March 2015. We believe that the group would either use internal cash to repay the notes or refinance them with Islamic borrowings.

-  There is a possibility that IOI may not be Syariah compliant based on its balance sheet as at end-June 2014. The group’s conventional borrowings over total assets ratio was 49.1%, which is above the threshold limit of 33%.

Source: AmeSecurities