1QFY19 Results Below Expectations

IOI Corp’s 1QFY19 core net profit of RM180m came in below our expectation, mainly due to a weaker-than-expected EBITDA margin. We cut our FY19-21E core EPS forecasts by 12-16%, mainly to take into account a lower CPO ASP assumption and our higher production cost forecast. We nevertheless raise our 12-month TP to RM4.27 (based on IOI Corp’s latest 5-year average mean) applied to our CY19E core EPS after assigning a higher PER multiple, taking into account its size, status and trading liquidity. Thus we upgrade IOI Corp to HOLD from SELL.

1QFY19 Core Net Profit of RM180.1m Fell Below Expectations

IOI Corp’s 1QFY19 revenue increased marginally by 0.5% yoy to RM1.88bn. The revenue contribution from the resource-based manufacturing division increased by 1.2% yoy to RM1.82bn, while the plantation division’s revenue declined by 16.9% yoy to RM52.8m. IOI Corp’s PBT (which is inclusive of net foreign-currency translation losses on foreign-currency denominated borrowings and deposits as well as fairvalue gains on derivative financial instruments from the resource-based manufacturing division) plunged by 56.6% yoy to RM195.2m. The weaker performance was partly attributable to the lower profit contribution from both the plantation (due to lower FFB production and lower CPO ASP) and resource-based manufacturing divisions (due to lower sales volume and margins from the refining sub-segment). For 1QFY19, CPO and PK ASPs were lower at RM2,255/MT (1QFY18 CPO ASP: RM2,645/MT) and RM1,773/MT (1QFY18 PK ASP: RM2,284/MT), while CPO production declined by 16.2% yoy to 160.5k MT. After excluding forex and other oneoff items,1QFY19 core net profit declined by 36.8% yoy to RM180.1m. This came in below our and the street’s expectations, accounting for 16% and 17% of our earlier and consensus FY19 forecasts. The variance to our forecast was partly attributable to a weaker-than-expected EBITDA margin.

Slightly Weaker Core Net Profit Sequentially

Sequentially, IOI Corp’s 1QFY19 revenue and PBT increased by 4.1% and >100% qoq, to RM1.88bn and RM195.2m, respectively. The stronger qoq profit was partly due to fair-value gains on biological assets and derivative financial instruments as well as a higher share of results of associates despite lower FFB production and CPO ASP. However, after excluding forex and other one-off items, 1QFY19 core net profit declined slightly by 1.5% qoq to RM180.1m.

Upgrade to HOLD With TP of RM4.27

We cut our FY19-21E core EPS forecasts by 12-16%, mainly to take into account a lower CPO ASP assumption for FY19-21E to RM2,300- 2,450/MT and our higher production cost assumption. Given the earnings revision, together with our higher target PER of 28x (based on IOI Corp’s latest 5-year average mean to reflect both its resource-based manufacturing division and plantation operations; previously 22x based on the plantation sector’s past average PER) applied to our CY19E core EPS, we raise our 12-month TP to RM4.27 (from RM3.90 previously). We view the higher PER as fair to reflect IOI Corp’s size, status and trading liquidity. Based on valuation, we upgrade IOI Corp to a HOLD rating (downside of 4.9% to our latest TP).

Key Risks

Key upside/downside risks include: 1) stronger/weaker economic growth leading to a higher/lower consumption of vegetable oils; 2) a sustained rebound/plunge in the CPO price; 3) higher-/lower-than-expected FFB and CPO production; and 4) changes in policies.

Source: Affin Hwang Research - 13 Nov 2018