IOI Corp’s FY17 core net profit of RM1.03bn came in below expectations. The variance was due to lower-than-expected contribution from the resource-based manufacturing division. We have cut our FY18-19 EPS forecasts by 10-12% to account for the weak results. As such, our target price on IOI Corp has been lowered to RM4.00. We downgrade the stock to SELL rating given the 11.7% downside potential to our new TP.

Core Net Profit Declined by 26.8% Qoq to RM165m

On a sequential basis, IOI Corp’s 4QFY17 revenue increased by 6.5% qoq to RM3.7bn. However, PBT that is inclusive of the net foreign currency translation gain and fair value loss on derivative financial instruments from the resource-based manufacturing division declined by 3.8% qoq to RM377.2m. After excluding forex and other one-off items, 4QFY17 core net profit declined by 26.8% qoq to RM164.9m.

FY17 Results Below Expectations

IOI Corp reported FY17 revenue and net profit of RM14.1bn and RM743.2m, respectively, up by 20.3% and 18% yoy. Revenue contribution from both the plantation and resource-based manufacturing divisions were higher yoy. The CPO and PK ASPs were higher at RM2,766/MT (FY16: RM2,249/MT) and RM2,691/MT (FY16: RM1,740/MT), respectively. After excluding forex and other one-off items, FY17 core net profit increased by 2.6% yoy to RM1.03bn, which accounts for 87.4% and 89% of our previous and the street’s FY17 forecasts. This came in below expectations and the variance was due to lower-than-expected contribution from the resourcebased manufacturing division. IOI Corp declared a second interim DPS of 5 sen, the bringing FY17 DPS to 9.5 sen (FY16 DPS: 8 sen).

TP Lowered to RM4.00, Downgraded to SELL

We have cut our FY18-19 EPS forecasts by 10-12% to account for the weak FY17 results, especially from the resource-based manufacturing division, and we introduce our FY20 EPS forecast. Our target price for IOI Corp is now lowered to RM4.00 (from RM4.50 previously), based on an unchanged 22x PER on 2018E EPS. We downgrade IOI Corp to a SELL rating (from HOLD previously) given the 11.7% downside potential to our new 12-month TP.

Source: Affin Hwang Research - 28 Aug 2017