Results

• 1HFY16 core net profit of RM574.7m (-11.8% yoy) came in line with our and consensus expectation, accounting for 48% and 53% of our and consensus full-year forecasts.

Deviations

• -

Dividends

• Declared a single tier dividend of 3.5sen/share and this translates into dividend yield of 0.7%.

Highlights

• 2QFY16 core net profit was down 29.8% qoq (-42.4% yoy), excluding the forex gain of RM227.3m and fair value gain on derivative financial instruments of RM260.5m. It was mainly dragged by weaker performance in resourcesbased manufacturing division (-35.7% qoq, -46.6% yoy) and lower contribution from associates despite better contribution from plantation division (+30.1% qoq, +15.4% yoy).

• 1HFY16 net profit was mainly dragged by the weaker performance from resources-based manufacturing division (12.3% yoy) owing to lower margin from the refining and the specialty oils and fats sub-segments. On the other hand, plantation division's operating profit was up 2.4% yoy supported by better PK ASP and improvement in OER.

• FFB production on track to meet expectation. IOI reported 1HFY16 FFB production of 1.9m tonnes (-3.4% yoy) and it is on track to meet our full year expectation of 1-3% yoy FFB production growth. The marginal decline in production was mainly due to the prolonged drought in Sabah area in 1Q15. Going into 3QFY16, production is likely to be weaker on seasonal factor and lagged impact from last year drought before picking up again in 4QFY16.

Risks

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

Forecasts

• No change to our earnings forecast.

Rating

HOLD

Positives

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

Negatives

• (1) Pricey valuations.

Valuation

Maintain HOLD with target price of RM4.15 based on SOP valuation.

Source: Hong Leong Investment Bank Research - 22 Feb 2016