Results

• 9MFY16 core net profit of RM705.3m (-9.9% yoy) was below our and consensus expectation, accounting for 59% and 65% of our and consensus full-year forecasts.

Deviations

• Lower than expected FFB production and higher than expected effective tax rate.

Dividends

• -

Highlights

• 3QFY16 core net profit was down 44.9% qoq (-0.4% yoy), excluding the forex gain of RM432.8m and fair value gain on derivative financial instruments of RM185m. It was mainly dragged by weaker performance in plantation division (-53.8% qoq, -19.1% yoy) despite better operating profit recorded in resources-based manufacturing division (+7.5% qoq, +34.9% yoy).

• The decline in 9MFY16 net profit (-9.9% yoy) was mainly due to the weaker performance from both plantation and resources-based manufacturing divisions. Plantation division was dragged by the sharp decline in FFB production by 8.5% yoy while resources-based manufacturing division was affected by lower sales volume and lower margin from refining sub-segment. Its margin declined to 4.6% from 4.9% in 9MFY15.

• FFB production below expectation. IOI reported 10MFY16 FFB production of 2.62m tonnes (-10.2% yoy), below our full year expectation, mainly due to the prolonged drought in Sabah area that resulted sharp drop in FFB production in 3QFY16 (-43.8% qoq, -23.2% yoy). As we expect production to stay weak in coming months, we now project a contraction of 10-13% in FFB production for FY16.

Risks

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

Forecasts

• We revise our earnings forecast downward by 7-18% for FY16-17 to factor in the lower FFB production forecast.

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: RM4.30) based on SOP valuation.

Source: Hong Leong Investment Bank Research - 19 May 2016