IOI’s FY18 core net profit of RM1.09bn (-1.3%) came in below our expectation, accounting for only 88% of our forecast, mainly on the back of higher-than expected CPO production cost. Against the consensus, the results were within, accounting for 96% of consensus forecast. Declared 2nd interim DPS of 4.5 sen (ex-date: 4 Sep 2019), bringing total DPS for FY18 to 20.5 sen. FY19-20 core net profit forecasts lowered by 8.5-8.9%, largely to account for higher CPO production cost assumptions. Correspondingly, SOP-derived TP was lowered by 8% to RM4.42, while HOLD rating is maintained.

Below our expectation. IOI’s 4QFY18 core net profit of RM172.6m (QoQ: -33%; YoY: -29.7%) took FY18 core net profit to RM1.09bn (-1.3%). The results missed our expectation, accounting for only 88% of our forecast. The weaker-than-expected results were due mainly to higher-than-expected CPO production cost. Against the consensus, the results came in within market expectations, accounting for 96% of consensus forecast.

Dividend. Declared 2nd interim DPS of 4.5 sen (ex-date: 4 Sep 2018), bringing total DPS for FY18 to 20.5 sen, translating to dividend yield of 4.5%.

QoQ. 4QFY18 core net profit declined by 33% to RM172.6m, as the slight improvement in performance at the manufacturing division was more than offset by lower FFB production and palm product prices.

YoY. 4QFY18 core net profit declined by 29.7% to RM172.6m, as better manufacturing earnings were more than offset by lower FFB production and palm product prices.

YTD. FY18 core net profit declined by 1.3% to RM1.09bn as lower plantation earnings (arising from lower palm product prices) were partly mitigated by improved manufacturing performance. Operating profit at the manufacturing division increased by 20.8% to RM352.6m mainly on the back of higher sales volume from all sub segments and better profitability achieved at the oleochemical sub-segment.

Forecast. We cut our FY19-20 core net profit forecasts by 8.5-8.9%, largely to account for higher CPO production cost assumptions.

Maintain HOLD, TP: RM4.42. We lower our SOP-derived TP by 8% to RM4.42, following the downward revision in our core net profit forecasts. 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 0.26x as at 30 Jun 2018) and strong operating cash flow generation (RM1.35bn or 20.5 sen/share in FY18), further upside is capped by its lofty valuation (FY19-20 P/E of 23.1x and 22.8x, respectively). Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 20 Aug 2018