IOI’s FY19 core net profit of RM710.5m (-34.6%) came in within our expectation, accounting for 99.3% of our forecast. Against market consensus, the results came in below estimates, accounting for only 87.4%. Proposed final DPS of 4.5 sen, bringing total DPS for FY19 to 8 sen. FY19 core net profit fell by 34.6% to RM710.5m, as improved earnings at manufacturing segment was more than offset by a 3.3% decline in FFB output (arising from higher replanting rate at its Sabah operations) and sharply lower palm product prices. We maintain our SOP-derived TP of RM3.84, but upgrade our rating to HOLD (from Sell previously), as valuations have become more compelling following recent share price retracement.

Within our expectation, but missed street estimates. 4QFY19 core net profit of RM158.1m (QoQ: -4.8%; YoY: -8.4%) took FY19 core net profit to RM710.5m (- 34.6%). The results came in within our expectation, accounting for 99.3% of our forecast, but missed consensus estimates, accounting for only 87.4% of consensus estimates.

Dividend. Proposed final DPS of 4.5 sen, bringing total DPS for FY19 to 8 sen, translating to a dividend yield of 1.9%.

QoQ. Core net profit fell 4.8% to RM158.1m in 4QFY19, as lower plantation and manufacturing segments (arising from weaker palm product prices and FFB output at plantation segment, lower margins from refining sub-segment as well as weaker contribution from 30%-owned 30%-owned Loders) were mostly offset by lower tax expense (arising from the absence of one-off adjustment for RPGT).

YoY. Core net profit fell 8.4% to RM158.1m, as higher FFB output, improved sales volume and margins from refining sub-segment, and lower net finance cost were more than negated by significantly lower realised average palm product prices (CPO: - 17.5%; PK: -37.4%) and lower contribution from 30%-owned Loders.

YTD. FY19 core net profit plunged 34.6% to RM710.5m, dragged mainly by lower FFB output (arising from replanting at Sabah operations) and significantly lower palm product prices (CPO: -20.6%; PK -38.3%) but was partly mitigated by improved manufacturing earnings.

FFB output to resume on uptrend by FY20. FFB output fell 3.3% to 3.5m tonnes in FY19, affected by higher replanting rate in its Sabah plantation operations. Management highlighted that FFB output growth will resume on uptrend by FY20 (albeit marginally), as lower FFB output contribution from Sabah operations (arising from higher replanting rate) will be more than mitigated by higher FFB output from young Indonesian plantings.

Forecast. Maintain.

Upgrade to HOLD; TP: RM3.84. Maintain SOP-derived TP of RM3.84 (see Figure 1). We upgrade our rating on IOI to HOLD (from Sell previously), as valuations have become more compelling following recent share price retracement. At RM4.23, IOI is trading at FY20-21 P/E of 32.9x and 31.6x, respectively. Valuations apart, the recent improved sentiment in plantation sector (due to improved demand prospects) will likely enhance trading sentiment for IOI.

Source: Hong Leong Investment Bank Research - 16 Aug 2019