3QFY20 core net profit of RM142.7m (QoQ: -35.2%; YoY: -14.1%) took 9MFY20 core net profit to RM560.4m (+1.4%). The results came in below expectations, accounting for only 67.3-69% of consensus and our full-year estimates. Lower than-expected FFB output and weaker-than-expected performance at 30%- owned associate (Loders) were the key culprits. We lower our FY20-22 core net profit forecasts by 0.2-10.6%, largely to account for lower FFB yield assumption in FY20, and lower earnings assumption at manufacturing segment. SOP derived TP lowered by 1.7% to RM3.82, to account for (i) the downward revision in our FY20-22 core net profit forecasts, and (ii) 32%-owned Bumitama’s latest share price. We downgrade our rating on IOI to SELL (from Hold previously).

Below expectations. 3QFY20 core net profit of RM142.7m (QoQ: -35.2%; YoY: - 14.1%) took 9MFY20 core net profit to RM560.4m (+1.4%). The results came in below expectations, accounting for only 67.3-69% of consensus and our full-year estimates. Lower-than-expected FFB output and performance at 30%-owned associate (due to provision for doubtful debts and mark-to-market losses for commodity derivatives) were the key deviations to the results shortfall.

Exceptional items (EIs) in 3QFY20. During the quarter, we adjusted for RM142.6m worth of EIs from IOI’s reported net profit. These include (i) RM236.4m forex translation loss on foreign currency denominated borrowings and deposits, (ii) RM6.4m fair value gain on derivative financial instruments at plantation segment, and (iii) RM87.4m fair value gain on derivative financial instruments at manufacturing segment.

QoQ. 3QFY20 core net profit declined by 35.2% to RM142.7m, as higher palm product prices (CPO: +20.4%; PK: +19.7%) were more than negated by (i) a 20.8% decline in FFB output (arising from seasonally low production cycle and 3-week closure order imposed on certain districts in Sabah, where 40% of IOI’s plantations are located), and (ii) weaker performance at oleochemical and refining sub-segments, coupled with share of loss from 30%-owned associates (Loders, due mainly to provision for doubtful debts and mark-to-market losses for commodity derivatives).

YoY. 3QFY20 core net profit shrunk 14.1% to RM142.7m as higher palm product prices (CPO: +37.2%; PK: +27.1%) was more than offset by a 29.6% decline in FFB output (due to lagged impact of the dry weather in 2018 and 3-week closure order imposed on certain districts in Sabah), and weaker manufacturing earnings (due to reasons mentioned above).

YTD. 9MFY20 core net profit rose 1.4% to RM560.4m as lower FFB output (-14%) and weaker showing at manufacturing segment (due to lower contributions from oleochemical and refining sub-segments) were mitigated by higher CPO prices and improved extraction rates.

Forecast. We lower our FY20 core net profit forecasts by -10.6% (FY21-22: -0.2%), largely to account for lower FFB yield assumption in FY20, and lower earnings assumption at manufacturing segment.

Downgrade to SELL with lower SOP-derived TP of RM3.82. SOP-derived TP lowered by 1.7% to RM3.82, to account for (i) the downward revision in our FY20-22 core net profit forecasts, and (ii) 32% -owned Bumitama’s latest share price. With the downward revision to our SOP-derived TP, we downgrade our rating on IOI to SELL (from Hold previously) as valuation has become pricey following recent share price performance.

Source: Hong Leong Investment Bank Research - 28 May 2020