• Adjusted for foreign currency translation gain on borrowings and fair value gain/loss in biological asset and derivatives instruments, IOI’s core PATAMI of RM580m was above our expectations.

• Higher margins of 4.3% (FY16: 3.4%) from RBM segments as well as 20% increase in share of result from associates of RM63.1m contributed to the improved results.

• Core PBT of RM763.4m was lower vs. RM783.6m in 1H17 mainly due to lower PK prices realized as well as lower CPO extraction rate.

• Adjusted PBT was lower by 11% qoq to RM360.4m on account of lower contribution from RBM segment due to lower margins from oleo-chemical and refining subsegments.

• We tweaked our FY18 and FY19 earnings forecast higher which resulted in a higher TP of RM4.80 (RM4.64 previously) whilst maintain HOLD recommendation.

Better 1H margin from RBM segment

IOIC posted a higher PATAMI of RM859.3m in 1H18, rising more than 100% from 1H17. The higher profit was mainly due to 1) foreign currency translation gain of RM265m (1H17: loss RM502m); 2) fair value gain on derivative financial instruments from the RBM segment of RM44.6m as opposed to a loss of RM93.1m in 1H16; and 3) higher contribution from share of result from associate amounting RM63.1m (1H16: RM52.5m), The higher profit is mainly driven by contribution from the RBM segment which saw an improvement in margin to 4.3% from 3.4% in 1H17. The RBM segment registered a higher core profit of RM190.3m compared to RM159.4m in 1H17 mainly due to higher sales volume from oleochemical and refining sub-segments as well as higher margins derived from the oleochemical sub-segment.

Lower margins from plantations segment

Core plantation profit slipped 5.3% yoy to RM656.1m as margins shrank from 56.4% to 50.8%. The lower profit is due mainly to lower PK prices realized as well as lower CPO extraction rate – though this was mitigated by higher FFB production and processed. Total FFB and CPO production increased by 10.9% and7.7% respectively to 1.89m MT and 408,269 MT during the period.

FFB and CPO production improved in 2Q18

IOIC’s underlying PBT of RM360.4m is 11% lower qoq. This was mainly due to lower contribution from RBM segments, resulted from lower margins from the oleo-chemical and refining sub-segments. Management expect that this division would perform well during the next six-months period as global and regional economies are expected to continue their steady growth hence, sustaining the demand for the products. On the other hand, plantation profit increased 12% qoq to RM340.9m mainly due higher production of CPO and PK as well as higher ASP of PK. FFB and CPO production increased by 17% and 13% respectively to 1.016m MT and 184.6k MT; whilst PK price surged 15% qoq to record at RM2,621/MT. Meanwhile, CPO price was flat at RM2,644/MT as opposed to RM2,645/MT in 1Q18.

First interim dividend of 4.5sen

The board has declared a dividend of 4.5sen (1H17: 4.5sen) for FYE June 2018 to be payable on 30th Mar 2018-. Based on current market price this translates into 1.1% yield.

Maintain HOLD

We have tweaked our FY18 and FY19 earnings forecast higher to RM1.12bn (RM1.05bn previously) and RM1.21bn (RM1.17bn previously) as we adjust our assumptions for earnings and costs mainly from RBM segment as we have assumed that the cost of feedstock will be lower in the future. Hence, we have increased our TP to RM4.80 (RM4.64) based on FY19 EPS and PER multiple of 25x (5-years average PER).

Source: BIMB Securities Research - 26 Feb 2018