IOI’s 1QFY19 core net profit of RM175.8m (QoQ: +1.9%; YoY: -43.5%) disappointed, accounting for only 14.2-16.3% of our and consensus full-year estimates, mainly on the back of (i) weaker-than-expected realised palm product prices, (ii) weaker-than-expected FFB production, and weaker-than-expected manufacturing earnings. We cut our FY19-20 core net profit forecasts by 17.3% and 11.5%, largely to account for realised palm product prices in 1QFY19 and lower FFB yield for plantation segment, and lower margin assumption at the manufacturing division. We lower our SOP-derived TP by 7.8% to RM4.07, as we (i) lowered our FY19-20 core net profit forecasts, and (ii) rolled forward our valuation base year (from FY19 previously to CY19). Maintain HOLD rating.

Below expectations. IOI’s 1QFY19 core net profit of RM175.8m (QoQ: +1.9%; YoY: - 43.5%) disappointed, accounting for only 14.2-16.3% of our and consensus full-year estimates. Key variances against our forecast include (i) weaker-than-expected realised palm product prices, (ii) weaker-than-expected FFB production, and weakerthan-expected manufacturing earnings (in particularly, the refining sub-segment).

QoQ. 1QFY19 core net profit rose marginally by 1.9% to RM175.8m, mainly on the back of improved contribution from oleochemical sub-segment and marginally lower tax expense, which more than mitigated weaker margin at the refining sub-segment, and lower FFB production and realised palm product prices at the plantation segment.

YoY. 1QFY19 core net profit declined by 43.5% to RM175.8m, mainly on the back of (i) sharply lower realised palm product prices (of which the ASP for CPO and PK declined by 15% and 22% YoY), (ii) lower FFB production (which declined by 18% to 713k tonnes), and (iii) lower sales volume and margins from refining sub-segment. On the brighter note, performance at oleochemical sub-segment improved on the back of low PK prices and steady demand for fatty acids and fatty esters.

Moving to 2QFY19… Performance at the manufacturing segment will perform better, underpinned by (i) low PK price and stable demand for fatty acids and fatty esters will sustain performance at the oleochemical sub-segment, (ii) improving refining and fractionation margins at the refining sub-segment, and (iii) sustained associate earnings (arising from commendable margins at the confectionery category). However, the improvement in manufacturing division will not be sufficient to mitigate the near term weakness in CPO prices.

Forecast. We cut our FY19-20 core net profit forecasts by 17.3% and 11.5%, largely to account for realised palm product prices in 1QFY19 and lower FFB yield for plantation segment, and lower margin assumption at the manufacturing division.

Maintain HOLD, TP: RM4.07. We lower our SOP-derived TP by 7.8% to RM4.07, as we (i) lowered our FY19-20 core net profit forecasts, and (ii) rolled forward our valuation base year (from FY19 previously to CY19). 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 0.31x as at 30 Sep 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 27.7x and 25.5x, respectively). Maintain HOLD recommendation.

Source: Hong Leong Investment Bank Research - 13 Nov 2018