Results

• 1QFY17 core net profit of RM322.9m (qoq: +72.1%; yoy: +3.4%) came in above expectations, accounting for 28.7- 29.7% of consensus and our full-year forecasts.

Deviations

• Better-than-expected earnings from plantation division, which more than mitigated weaker-than-expected manufacturing earnings.

Dividends

• None.

Highlights

• QoQ… 1QFY17 core net profit rose by 72.1% to RM322.9m, boosted mainly by: (1) Higher palm product prices, FFB production and OER (which has in turn boosted operating profit at the plantation segment by 94.8% to RM334.2m); and (2) Improved contribution from manufacturing division.

• YoY… 1QFY17 core net profit increased marginally (by 3.4%), as weaker manufacturing earnings (resulted from lower sales volume and higher PK raw material cost at the oleochemical sub-segment) and higher effective tax rate were more than mitigated by higher plantation earnings (arising from higher palm product prices).

Risks - downside

• Weaker-than-expected FFB output;

• Escalating CPO production cost; and

• Weaker-than-expected recovery in edible oil demand and prices.

Forecasts

• We raise our FY17-18 core net profit forecasts by 2.3% and 0.9% to RM1.11bn (EPS of 17.7 sen) and RM1.25bn (EPS of 19.9 sen), mainly to reflect marginally higher FFB output and lower interest expense assumptions, which more than offset lower EBIT margin assumption at the manufacturing division (although the suspension of RSPO certification has already been lifted since 18 Aug 2016, we believe it would take a while before regaining some of the business and margins lost during the suspension period). We also take the opportunity to introduce our FY19 net profit forecast of RM1.27bn (EPS of 20.2 sen).

Rating

HOLD ( ↔ )

• While we like IOI for its efficient plantation management (evidenced by its superior FFB yield vis-à-vis the industry average), healthy balance sheet (net gearing of 0.66x as at FY16) and strong operating cash flow generation (RM1.63bn or 26 sen/share in FY16), further upside is capped by its lofty valuation (FY17-18 P/E of 24.7x and 22x respectively.

Valuation

• SOP-derived TP raised by 6.8% to RM4.41 to reflect: (1) the uplift in our earnings forecast; and (2) the roll forward of valuation base year from FY17 to FY18. Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 21 Nov 2016