Highlights

• IOI announced the cancellation of 178m treasury shares (equivalent to ~2.8% of its existing issued shares of 6.46bn shares).

• We note that IOI has undertaken such exercise in the past, and the last time it announced such exercise was back in Mar-2011 (when it cancelled 4.5% of its existing shares).

Comments

• Positive. While the cancellation of treasury shares does not have an impact on IOI’s overall earnings outlook, we are still positive on the latest development, as it boosts EPS (by circa 2.8%) and valuation of the stock.

Risks

• Sharp fall in FFB output and/or palm product prices;

• Escalating CPO production cost; and

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

Forecasts

• Maintain core net profit forecasts, but FY18-19 EPS forecasts raised by 2.8% to 21 sen and 21.5 sen respectively.

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 23.2x and 21.4x respectively).

Valuation

• Maintain SOP-derived TP of RM4.69 (see Figure 1) and HOLD recommendation on the stock, as we have already excluded treasury shares in our SOP valuation.

Source: Hong Leong Investment Bank Research - 30 Jun 2017