Results

9MFY06/13 core net profit of RM1,327.5m (-5.1%) beat expectations, accounted for 85.1% of our full-year forecast and 79.6% of full-year consensus estimates.

Deviations

• Higher-than-expected property development earnings; and
• Better-than-expected profitability at the resource-based manufacturing division.

Highlights

QoQ. Despite revenue declining by 11% (on lower plantation and property development revenue contribution), 3QFY06/13 core net profit rose marginally by 0.8% to RM464.1m mainly due to: (1) Higher sales volume and profitability from the oleochemicals and refinery subsegments; and (2) Higher property earnings contribution, which in turn was due to higher development profit recognised.

YTD. Core net profit declined by 6.5% to RM1,327.5m largely on the back of lower palm product prices (CPO: - 20.5%; PK: -34.7%) which more than offset higher earnings contribution from the property and resourcebased manufacturing segments.

Profitability at the resource-based manufacturing segment continued to improve for the 3rd consecutive quarter, thanks to higher sales volume and margins from refinery and specialty fats sub-segments. Risks - downside

Recovery in global vegetable oil production may result in a sharp plunge in vegetable oil prices; and

Economic uncertainties in world’s major economies that may hurt demand and prices of edible oil (including palm oil).

Forecasts

We are raising our projected FY06/13-15 core net profit by 14.4%, 15.1% and 11.2% respectively, largely to account for higher EBIT assumptions for the resource-based manufacturing and property development segments.

Rating

HOLD

• Positives – (1) Value accretive demerger; (2) Strong balance sheet; and (3) Unlocking of property assets.
• Negatives – Weak near-term upstream plantation sector outlook.

Valuation

SOP-derived TP adjusted upwards to RM5.11 (from RM4.97 previously) largely to reflect: (1) The upward net profit forecast adjustment; and (2) IOIC’s latest net debt position. Maintain Hold recommendation on the stock as we believe our less bullish view on IOIC’s plantation earnings outlook will be mitigated by the recently announced demerger proposal, which would unlock values of IOIC’s property business.

Source: Hong Leong Investment Bank Research - 22 May 2013