IOI’s 1HFY19 core net profit of RM386.3m (-41.4%) came in within our expectation, accounting for 46% of our full-year forecast. Declared interim DPS of 3.5 sen (ex-date: 8 Mar 2019). During the quarter, core net profit plunged by 40.5% to RM210.5m due mainly to weaker plantation earnings. We maintain our FY19-21 core net profit forecasts but raise our SOP-derived TP by 0.2% as we updated IOI’s latest quarterly net debt position. Downgrade rating to SELL (from Hold) as valuation has become lofty after recent share price appreciation (+7.5% YTD). While we expect 2HFY19 performance to improve vis-à-vis 1H19, we believe share price has run ahead of fundamentals. At current share price of RM4.73, IOI is trading at FY19-21 P/E of 35.4x, 30.7x, and 29.7x, respectively.

In line. 2QFY19 core net profit of RM210.5m (QoQ: +19.7%; YoY: -40.5%) took 1HFY19 core net profit to RM386.3m (-41.1%), accounting for 40.3-46% of consensus and our full-year forecasts. We consider the results within our expectation, as we expect 2H to come in stronger on the back of palm product price recovery, and decent performance from specialty fat (30%-owned) and oleochemical divisions.

Dividend. Declared interim DPS of 3.5 sen (ex-date: 8 Mar 2019). For the full-year, we are projecting a total DPS of 8 sen, translating to dividend yield of 1.7%.

QoQ. 2QFY19 core net profit increased by 19.7% to RM210.5m as lower palm product prices (CPO: -14.3%; PK: -18.6%) was more than mitigated by higher associate contribution and better performance at refining sub-segment (arising from higher sales volume and margins), lower finance cost and tax expense.

YoY. 2QFY19 core net profit plunged by 40.5% to RM210.5m, as improved earnings contribution from 30%-owned Bunge Loders Croklaan, higher sales volume and margins from oleochemical and refining sub-segments, lower net interest expense and effective tax rate were more than negated by weaker plantation earnings. During the quarter, lower FFB production (-3.3%) and realised palm product prices (CPO: - 26.9%, PK: -44.9%) have collectively resulted in earnings at the plantation segment declining by 65.6% to RM117.3m in 2QFY19.

YTD. 1HFY19 core net profit declined by 41.9% to RM386.3m, as better manufacturing performance (arising from improved sales volume and margins from oleochemical sub-segment and performance at 30%-owned Bunge Loders Croklaan) were more than negated by sharply lower plantation earnings. Lower FFB production (-10.1%) and sharply lower realised palm product prices (CPO: -21.5%; PK: -36.1%) have collectively resulted in plantation earnings plunging by 58.7% to RM268.5m in 1HFY19.

Forecast. Maintain.

Downgrade to SELL; TP: RM4.04. We raise our SOP-derived TP marginally higher to RM4.04 (from RM4.03 previously) as we updated IOI’s latest net debt position. However, we downgrade our rating to SELL (from Hold) as valuation has become pricey after recent share price appreciation (share price has appreciated by 7.5% YTD). While we expect 2HFY19 performance to improve vis-à-vis 1H19, we believe share price has run ahead of fundamentals. At current share price of RM4.73, IOI is trading at an expensive FY19-21 P/E of 35.4x, 30.7x, and 29.7x, respectively.

Source: Hong Leong Investment Bank Research - 21 Feb 2019