Results

• 1QFY06/16 core net profit of RM337.7m (+40.1% qoq, +40.9% yoy) came in line with our but above consensus expectation, accounting for 26% and 31% of our and consensus full-year forecasts.

Deviations

• -

Dividends

• -

Highlights

• Better qoq and yoy performance were mainly due to the improvement in resources-based manufacturing segment while plantation segment was affected by lower CPO prices (-3.6% qoq, -6.2% yoy) despite better qoq FFB production growth of 8.9% (flat yoy).

• Weaker production growth for FY06/16. We are revising our FY06/16 FFB production growth forecast to 2-3% from 5-6% previously as its production in 2HFY06/16 is likely to be affected by the lagged impact from severe dry weather in Sabah. IOI has about 60% of its planted area located in Sabah. For 4MFY06/16, IOI’s FFB production was flat yoy , at 1.33m tonne and production is likely to slowdown in 2QFY06/16 during low production season.

• Healthy contribution from resources-based manufacturing division. We believe that IOI’s downstream operation would continue to be supported by better margin from the oleochemical and specialty fats business given IOI’s focus on more niche and highermargin products.

Risks

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

Forecasts

• We cut our FY06/15-17 earnings forecasts by 4-5% to factor in weaker FFB production assumptions.

Rating

HOLD

Positives

• (1) Decent balance sheet; and (2) Strong cash flow generation ability.

Negatives

• (1) Pricey valuations.

Valuation

• Maintain HOLD with lower target price of RM4.00 (previous TP: RM4.04) based on SOP valuation.

Source: Hong Leong Investment Bank Research - 17 Nov 2015