Results

• 1QFY06/15  core net profit of RM228.8m (qoq:  -15.1%; yoy: -22.4%)  came  in  below  expectations,  accounting  for  only 15.7-16.5%  of our and consensus full-year  forecasts.

Deviations

• Weaker-than-expected  margins  at  the  resource-based manufacturing  division.

Dividends

-Highlights  #p#QoQ…  Although  revenue  increasing  by  6.7%  to RM3.02bn,  1QFY06/15  core  net  profit  declined  by  15.1% to  RM228.8m  mainly  on  the  back  of  lower  palm  product prices  (average  prices  of  CPO  and  PK  fell  by  15.1%  and 29.2%  to  RM2,258/mt  and  RM1,517/mt ,  respectively), marginally  higher  net  interest  expense  and  higher  tax expense  (we  note  that  effective  tax  rate  during  the  quarter rose  by  13.6%-pts  to  32.7%).   Operating margin  at  the resource-based  manufacturing  division  fell  to  3.6%  (from 3.8%  in  the  previous  quarter  and  6.6%  in  the  previous year),  operating profit  at  the  division  rose  1.3%  to RM105.3m,  and  we  believe  this  was  due  mainly  to  higher sales volume.

Risks - downside

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

Forecasts

• FY06/15-17  net  profit  #p#Forecasts cut  by  2.8-8.1%,  largely  to reflect  lower  EBIT  margin  assumptions  at  the  resource based manufacturing  division.

Rating

HOLD

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

Valuation

• Post  earnings  forecast  revision,  SOP-derived  TP  is  cut  by 3.7%  to  RM4.23.  While  we  like  IOI  for  its integrated  operations  along  the  oil  palm  plantation  sector value  chain  as  well  as  its  strong  balance sheet, we believe share  price  is  already  ahead  of  its  fundamentals  at  this juncture.  Hence,  we  are  maintaining  our  HOLD recommendation  on the stock.

Source: Hong Leong Investment Bank Research - 18 Nov 2014