Highlights

IOI   is  confident  that  earnings  growth  trajectory  will  sustain into FY15, as: 1.  It  sees  limited  downside  to  CPO  pric e,  and  believes CPO  price  would  trend  up  once  the  seasonally  strong production  period  is  over  (by  Nov-14).  Over  the  longer term,  it  ex pects  CPO  pric e  to  average  between RM2,400-2,700/mt; 2.  Age profile is still supportive  of FFB output growth,  with 60% of its oil palm plantations in prime age (7  – 20 years old)  and  23%  of  its  oil  palm  plantations  in  young  and immature age (below  7 years);   and 3.  Downstream operations (in particularly, the oleochemical and specialty fats sub-segments)  will continue to do well.

Apart from developing the remaining 25,000 ha of unplanted landbank  in  Indonesia  (over  the  next  3 -4  years),  it  is strengthening  its  foothold  in  the  downstream  segment, through  s etting  up  a  fatty  ester  plant  (catered  for  food, cosmetics  and  pharmaceutical  industries  and  expected  to commence  production  next  month)  and  expanding  its specialty fats product range.

IOI’s  conventional  debt/total  asset  ratio  of  ~49%  (as  at  30 Jun  2014 )  indicates  that  it  may  not  be  able  to  retain  its Shariah-c ompliant  status  upon  SC’s  review  in  Nov-14. Nevertheless,  we  believe  IOI  will  not  have  issue  to  regain the  Shariah-compliant  status,  given  its  huge  cash  pile  of ~RM4bn  as  at  30  Jun  2014.   I t  only  needs  to  utilize  about 62%  of  the  cash  reserve  in  order  to  bring  its  conventional debt/total asset ratio back to 33%.

Catalysts 

• CPO prices recover  further;
• Better-than-expected  FFB output;
• Better-than-expected  downstream  performance.

Forecasts 

• Maintained.

Risks  - downside

• Weaker-than-expected  FFB output;
• Escalating CPO production  cost; and
• Weaker-than -expected  recovery  in  edible  oil  demand  and prices.

Rating  HOLD

• Positives  –  (1)  Improved  demand  outlook  for  CPO;  (2) Decent balance sheet; and (3) Strong c ash flow  generation ability.
• Negatives  –  Pricey valuations.  

Valuation 

• SOP-derived  TP  of  RM4.39  and  Hold  recommendation maintained.

Source: Hong Leong Investment Bank Research - 25 Sep 2014