Results

• 2QFY18 core net profit of RM344.7m (qoq: 10.8%; yoy: - 17.4%) took 1HFY18 core net profit to RM655.9m (-7%), accounting for 56-56.6% of consensus and our full-year forecasts. We consider the results within expectations as we expect 2H performance to weaken on weaker palm product prices.

Deviations

• Broadly in line.

Dividends

• Declared first interim DPS of 4.5 sen (ex-date: 14 Mar 2018). For the full year, we are projecting a total DPS of 9.2 sen (translating to dividend yield of 1.9%).

Highlights

• QoQ… 2QFY18 core net profit increased by 10.8% to RM344.7m mainly on the back of higher FFB production and PK prices, which altogether more than mitigated weaker performance at the manufacturing division (arising from lower margins at oleochemical and refining sub segments).

• YoY… 2QFY18 core net profit declined by 17.4% to RM344.7m mainly on the back of lower earnings from plantation (lower palm product prices but partly offset by higher FFB production) and manufacturing divisions.

• YTD… 1HFY18 core net profit declined by 7% to RM655.9m as better performance at manufacturing division (arising from higher sales volume from oleochemical and refining sub-segments and higher margins at oleochemical sub-segment) was more than offset by weaker plantation earnings (arising from lower PK prices and CPO extraction rate, but partly offset by higher FFB production).

Risks - Downside

• Weaker-than-expected FFB output;

• Escalating CPO production cost; and

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

Forecasts

• Maintained.

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. 63x as at 31 Dec 2017) and strong operating cash flow generation (RM1.29bn or 20.5 sen/share in FY17), further upside is capped by its lofty valuation (FY18-19 P/E of 26.1x and 23.8x, respectively)

Valuation

• Maintain HOLD recommendation, with unchanged SOP derived TP of RM4.76 (see Figure 4).

Source: Hong Leong Investment Bank Research - 26 Feb 2018