FY20 core net profit of RM791.6m (+11.4%) beat expectations, accounting for 107.8-109% of consensus and our estimates, due mainly to better-than-expected earnings contribution from manufacturing segment and plantation associate. Declared 2nd interim DPS of 4 sen (going ex on 9 Sep 2020), bringing total DPS to 8 sen in FY20. We raise our FY21-22 core net profit forecasts by 12.5% and 11.2%, mainly to account for higher earnings assumptions at manufacturing segment and plantation associate (i.e. Bumitama). Correspondingly, we upgrade our rating on IOI to HOLD with a higher SOP-derived TP of RM4.38.

Above expectations. 4QFY20 core net profit of RM231.2m (QoQ: +62.0%; YoY: +46.2%) took FY20 core net profit to RM791.6m (+11.4%). The results beat expectations, exceeding consensus and our estimates by 7.8-9.0%. The positive results surprise was due mainly to better-than-expected earnings contribution from manufacturing segment and associate (Bumitama, a 32% owned associate of IOI).

Exceptional items (EIs) in 4QFY20. We adjusted for RM7.1m worth of EIs from IOI’s reported net profit in 4QFY20. These include (i) RM1.4m net forex translation loss on foreign currency denominated borrowings and deposits, (ii) RM4.4m fair value loss on derivative financial instruments at plantation segment, and (iii) RM12.9m fair value gain on derivative financial instruments at manufacturing segment.

Dividend. Declared 2nd interim DPS of 4 sen (going ex on 9 Sep 2020), bringing total DPS to 8 sen in FY20 (similar to FY19).

QoQ. Core net profit surged 62.0% to RM231.2m in 4QFY20, due mainly to a 37% surge in FFB production, stronger earnings contribution from both oleochemical and refining sub-segments (resulted from sales volume and margin improvement), and higher associate contribution from special fats associate (Bunge Loders Corklaan Group), which altogether more than mitigated lower palm product prices (CPO: -12.4%; PK: -19.1%).

YoY. Core net profit surged 46.2% to RM231.2m in 4QFY20, boosted by higher palm product prices and FFB production, but partly offset by lower contributions from oleochemical and refining sub-segments (as a result of lower margins and sales volume) and lower associate contribution from special fats associate (as a result of Covid-19 pandemic).

YTD. FY20 core net profit increased by 11.4% to RM791.6m, as lower FFB production (-8.9%) and lower manufacturing earnings (due to same reasons mentioned in paragragh above) were more than mitigated by higher CPO price and OER.

FFB production. FFB production fell 8.9% to 3.1m tonnes in FY20, as a result of aggressive replanting and lagged impact from dry weather in 2018-19, management guided that FFB production will remain flattish (or slightly lower) in FY21, due to aggressive replanting program in Sabah (but will be partly offset by higher crop production from its Indonesian estates).

Forecast. We raise our FY21-22 core net profit forecasts by 12.5% and 11.2% to RM905.2-970.5m, mainly to account for higher earnings assumptions at manufacturing segment and plantation associate (i.e. Bumitama).

Upgrade to HOLD, with higher SOP-derived TP of RM4.38. Post upward earnings revision, we upgrade our rating on IOI to HOLD (from Sell earlier) with a higher SOP derived TP of RM4.38 (from RM3.82 earlier).

Source: Hong Leong Investment Bank Research - 26 Aug 2020