Stock Name: IOICORP
Company Name: IOI CORPORATION BHD
Research House: ECMLIBRA

IOI Corporation Bhd
(Oct 14, RM5.80)
Upgrade to buy at RM5.74 with revised target price RM7.22 (from RM5.89): IOI has been rising for a good couple of months, increasing 8.3% since Sept 1. Wednesday's close of RM5.74 is close to our target price (TP) of RM5.89 and we view that given sector fundamentals, there is more upside for IOI. Year-to-date, IOI's 4.9% gain lags behind the FBM KLCI's gain of 17.3%.

We expect the local equity market to be driven by foreign net equity inflows in 4QCY10, and in this respect IOI is also a laggard. IOI's foreign shareholding hit a high of about 33% in mid-2008 before the commodity price crash. We estimate foreign shareholding at 20% currently, which indicates there may be upside should foreigners take further interest in the stock.

Key fundamental drivers for crude palm oil (CPO) prices at the moment are: (i) stronger exports driven by new demand from Pakistan and Egypt, as well as demand from the US and EU; (ii) production is weak, as October's production surge may not be sufficient to take the industry through the upcoming festive season and 1QCY11 cyclical downturn in production; and (iii) potential for a supply crunch in the soyabean market despite record crops in North America as supplies are being mopped up by China and from bio-diesel demand. We believe these three key factors will keep CPO prices buoyant.

We are raising our FY11 CPO average selling price (ASP) to RM2,700 per metric tonne from RM2,500 previously. This brings up our FY11 EPS by 8.2%. We also raise FY12 CPO ASP to RM2,700 from RM2,500 previously and EPS increases by 8.4%. Our yield assumption of 26mt per hectare remains status quo and fresh fruit bunch growth expectation of 1% is also unchanged for both years. To note, CPO futures closed at RM2,930 per mt on Oct 13.

When CPO prices reached past RM3,000 in early 2008, IOI traded at a rolling forward PER in excess of 30 times. Currently, IOI still trades at 19.9 times on FY11 EPS. As such we believe there is still room to run, given the fundamentals. Hence, we are raising our PER estimate by +1 standard deviation which gives a PER of 25 times. Pegging FY11 EPS to 25 times raises our TP to RM7.22 (RM5.89 previously on 22 times PER) which implies 26% upside from the current price. ' ECM Libra Investment Research, Oct 14


This article appeared in The Edge Financial Daily, October 15, 2010.