Results

• 4QFY17 core net profit of RM242.5m (qoq: +62.2%; yoy: +29.3%) took FY17 core net profit to RM1.09bn (+31.4%). The results came in below expectations, accounting for only 88.8-88.9% of our and consensus forecasts.

Deviations

• Weaker-than-expected FFB output and margin at manufacturing division.

Dividends

• None.

Highlights

• QoQ… 4QFY17 core net profit rose 62.2% to RM242.5m, driven mainly by higher plantation earnings (which in turn was driven mainly by seasonally higher FFB output) and a sharp improvement in manufacturing earnings (arising from higher sales volume and higher margins from the oleochemical and refining sub-segments).
• YoY… 4QFY17 core net profit rose 29.3% to RM242.5m, driven mainly by: (1) Higher FFB production and palm product prices (which has in turn resulted in a 17.3% increase in plantation operating profit); and (2) Higher sales volume and margin at the oleochemical sub- segment.
• YTD… FY17 core net profit rose 31.4% to RM1.09bn, boosted largely by higher palm product prices amidst flattish FFB output growth (which has in turn resulted in plantation operating profit increasing by 45%) and stronger associate contribution, which altogether more than mitigated lower manufacturing earnings (arising from lower refining margin at the manufacturing segment). Risks - downside
• Weaker-than-expected FFB output;
• Escalating CPO production cost; and
• Weaker-than-expected recovery in edible oil demand and prices.

Forecasts

• FY18-19 core net profit forecasts lowered by 12.6% and 6.4% as we lower our FFB output and manufacturing 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 22.1x and 21.5x respectively.

Valuation

• Maintain HOLD recommendation, with lower SOP-derived TP of RM4.38 (from RM4.69 previously) largely to reflect the downward adjustment in our earnings forecasts.

Source: Hong Leong Investment Bank Research - 29 Aug 2017