Results

• Above expectations. 2QFY17 core net profit of RM358.9m (qoq: +11.1%; yoy: +51.7%) took 1HFY17 core net profit to RM695.1m (+21%). The results came in above expectations, accounting for 61.6-62.4% of consensus and our full-year forecasts.

Deviations

• Better-than-expected earnings at both plantation (driven by better-than-expected yield) and manufacturing divisions.

Dividends

• Declared interim DPS of 4.5 sen (ex-date 3 Mar 2017).

Highlights

• QoQ… 2QFY17 core net profit rose 11.1% to RM358.9m, due mainly to higher palm product prices (CPO: +12.3%; PK: +10.7%), better performance at the manufacturing division (which in turn was boosted by higher sales volume from oleochemical sub-segment and margin expansion at both oleochemical and refining sub-segments), which altogether more than offset a seasonally lower FFB output (-5.2%).
• YTD… 1HFY17 core net profit increased by 21% to RM695.1m, as weaker margin at the manufacturing division (arising from lower sales volume and higher PK prices) and a 10.6% decline in FFB production were more than mitigated by higher palm product prices (CPO: +22.8%; PK: +84.2%). 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 12.4% and 6.9% to RM1.22bn and RM1.33bn respectively, largely to reflect higher FFB yield and manufacturing EBIT margin assumptions.

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 4.5% to RM4.69 , to reflect the uplift in our net profit forecasts.

Source: Hong Leong Investment Bank Research - 21 Feb 2017