Results

1HFY06/14 core net profit of RM699.2m (+9%) accounted for 44.6-47.3% of our and consensus full-year forecasts. We consider the results within our expectation as we expect a better 2H on the back of higher palm product prices (spot CPO price has gone up by 10.6% from an average of RM2,511/mt in 2QFY06/14 to RM2,776/mt recently).

Deviations

None

Dividends

Declared interim single tier DPS of 8 sen (ex date: 12 Mar 2014; payment date: 21 Mar 2014). For the full year, we are projecting a total DPS of 17 sen, translating to a total yield of 3.6%.

Highlights

YTD. Although revenue was 3.2% lower (at RM6.2bn), 1HFY06/14 core net profit increased by 9% to RM699.2m mainly on the back of margin expansion at the resourcebed manufacturing segment, which has resulted in operating profit of the segment nearly doubled to RM251.7m (from RM231.9m a year ago).

QoQ. 2QFY06/14 core net profit rose by 31.1%to RM386.6m mainly on the back of continued improvement at the resource-based manufacturing segment (which operating profit continued to increase to RM251.7m from RM208.7m in the previous quarter) thanks to margin expansion, as well as higher sales volume at the oleochemical sub-segment.

Risks - downside

• Recovery in global vegetable oil production may result in a sharp plunge in vegetable oil prices;
• Economic uncertainties in world’s major economies that may hurt demand and prices of edible oil (including palm oil); and
• Escalating CPO production cost.

Forecasts

Maintained.

Rating

HOLD

Positives – (1) Improved demand outlook for CPO; (2) Decent balance sheet; and (3) Strong cash flow generation ability.

Negatives – Pricey valuations.

Valuation

SOP-derived TP raised by 7 sen to RM4.60 as we updated our forecast parameters. Maintain Hold recommendation. We note that IOI’s share price could overshoot our TP in the short term, as the recent run-up in CPO prices (if it sustains further) will boost investors’ interest in plantation stocks (including IOI, given its high liquidity).

Source: Hong Leong Investment Bank Research - 26 Feb 2014