- Maintain BUY on IOI Corporation with an unchanged fair value of RM4.55/share. Our fair value of RM4.55/share implies an FY16F PE of 27x. IOI’s foreign shareholding is currently 16%.

- IOI reported a net loss of RM719.0mil in 1QFY16, dragged by an unrealised net translation loss of RM853.9mil (1QFY15: RM52.2mil) on USD borrowings and fair value loss of RM198.5mil on derivative financial instruments.

- The unrealised translation loss came as the USD appreciated by 34.0% from USD1.00:RM3.2805 as at end- September 2014 to USD1.00:RM4.3950 as at end- September 2015. About 87.3% of IOI’s borrowings were denominated in USD at end-September 2015.

- Excluding these two items, IOI’s net profit would have improved by an estimated 25.8% YoY in 1QFY16 on the back of a recovery in manufacturing profit margin. IOI attributed this to the improved performance of its oleochemical and refining sub-segments.

- Excluding the fair value loss on derivatives, profit margin for its manufacturing division would have risen from 4.3% in 1QFY15 to 6.2% in 1QFY16. Due to the fair value loss, the division recorded a loss of RM8.8mil in 1QFY16.

- We consider the fair value loss of RM198.5mil as part of IOI’s core operations. As such, IOI’s results were below expectations and consensus estimates. In spite of this, we are keeping the group’s earnings forecast for now in anticipation of a recovery in CPO price in the coming quarters.

- Plantation revenue shrank by 7.0% YoY to RM495.8mil in 1QFY16 due to lower CPO price. Average CPO price realised was RM2,119/tonne in 1QFY16 versus RM2,258/tonne in 1QFY15.

- FFB production was flat YoY at 967,612 tonnes in 1QFY16. We have assumed that IOI’s FFB production would grow by 2% in FY16F. About 2.8% of IOI’s FFB output is expected to come from Indonesia in FY16F versus 1.7% in FY15. The group’s FFB production in Indonesia is forecast to surge by 66.7% from 60,000 tonnes in FY15 to 100,000 tonnes in FY16F.

- Working backwards, we estimate IOI’s plantation production cost at RM884/tonne in 1QFY16 compared with RM952/tonne in 1QFY15. The operating profit margin of the plantation division was 52.0% in 1QFY16 against 52.7% in 1QFY15.

- A negative point is IOI’s net gearing, which rose from 93.9% as at end-June 2015 to 145.0% as at end-September 2015 as borrowings increased by RM1.05bil.

Source: AmeSecurities Research - 17 Nov 2015