IOI’s 9MFY19 core net profit of RM552.4m (-39.5%) missed expectations, accounting for only 60.3-65.7% of consensus and our full-year estimates, due to lower-than-expected palm product prices and FFB production. We lower our FY19 core net profit forecast by 13.3% to RM728.8m, mainly to account for realised palm product prices YTD. We leave our FY20-21 core net profit forecasts unchanged for now, pending a further review in our projected average CPO price assumptions post reporting season. Despite the earnings disappointment, we raise our SOP-derived TP marginally higher to RM4.08 (from RM4.04 early) as we updated IOI’s latest net debt position. Despite the limited downside to our TP, We maintain our SELL rating on IOI, as we are likely to lower our CPO price assumptions across the board post reporting season.

Missed expectations. 3QFY19 core net profit of RM166.1m (QoQ: -21.1%; YoY: - 33.2%) took 9MFY19 core net profit to RM552.4m (-39.5%). The results missed expectations, accounting for only 60.3-65.7% of consensus and our full-year estimates. Lower-than-expected palm product prices and FFB production were the key culprits to the earnings disappointment. QoQ. Despite resource-based manufacturing segment reported a sharp earnings improvement (arising from margin expansion at refining sub-segment), 3QFY19 core net profit declined by 21.1% to RM166.1m, as improved performance at resource based manufacturing segment was more than offset by an 8.7% decline in FFB production and higher tax expense (arising from a one-off adjustment for RPGT).

YoY. 3QFY19 core net profit declined by 33.2% to RM166.1m as better performance at resource based manufacturing segment (arising from higher sales volume and margins from refining sub-segment, coupled with better performance at 30%-owned Loders) and marginally higher FFB production were more than offset by sharply lower palm product prices (CPO: -20.2%; PK: -40.4%) and higher tax expense (arising from a one-off adjustment for RPGT).

YTD. 9MFY19 core net profit declined by 39.5% to RM552.4m, as better resource based manufacturing performance (thanks to margin expansion from all sub segments and better contribution from 30%-owned Loders) was more than offset by lower FFB production (-5.8%) and palm products prices (CPO: -21.4%; PK: -38%).

Forecast. We lower our FY19 core net profit forecast by 13.3% to RM728.8m, mainly to account for realised palm product prices YTD. We leave our FY20-21 core net profit forecasts unchanged for now, pending a further review in our projected average CPO price assumptions post reporting season. Our sensitivity analysis indicates that every RM100/mt change in our average CPO price assumptions will change our FY20-21 core net profit forecasts by circa 5.5%.

Maintain SELL; TP: RM4.08 Despite the earnings disappointment, we raise our SOP derived TP marginally higher to RM4.08 (from RM4.04 early) as we updated IOI’s latest net debt position and valuing IOI based on CY20 earnings. Despite the limited downside to our TP, we maintain our SELL rating on IOI, as we are likely to lower our CPO price assumptions across the board post reporting season, which would lead to earnings forecasts being lowered.

Source: Hong Leong Investment Bank Research - 23 May 2019