IOI Corp’s 1HFY19 core net profit of RM369.4m came in below our expectation, mainly due to a weaker-than-expected EBITDA margin. We cut our FY19-21E core EPS forecasts by 4-13%, mainly to take into account lower contributions from both the plantation and resource-based manufacturing divisions. Given the earnings revision, together with our higher target PER of 32x (based on the Malaysian plantation sector’s 2019E average PER applied to our CY19E core EPS), we raise our 12-month TP to RM4.47 (from RM4.27 previously). We believe this higher PER is appropriate after taking into account its size, status and trading liquidity. Maintain HOLD rating on the stock.

1HFY19 Core Net Profit of RM369m, Below Expectations

IOI Corp’s 1HFY19 revenue declined by 3.1% yoy to RM3.8bn, mainly due to lower contributions from both its plantation and resource-based manufacturing divisions. For 1HFY19, CPO and PK ASPs were lower at RM2,081/MT (1HFY18 CPO ASP: RM2,650/MT) and RM1,576/MT (1HFY18 PK ASP: RM2,468/MT), while CPO production declined by 7.7% yoy to 377k MT. IOI Corp’s PBT (which is inclusive of net foreign-currency translation losses on foreign-currency-denominated borrowings and deposits as well as fair-value gains on derivative financial instruments from the resource-based manufacturing division) plunged by 60% yoy to RM434.2m. The weaker performance was partly attributable to a lower profit contribution from the plantation division (due to lower CPO ASPs and production) but partially offset by a higher profit contribution from the resource-based manufacturing division (due to higher sales volume and margins from the oleo-chemical sub-segment). After excluding forex and other one-off items,1HFY19 core net profit declined by 40.1% yoy to RM369.4m, below our and the street’s expectations, and accounting for 39% and 38% of our earlier and consensus FY19 forecasts. The variance to our forecast was partly due to a weaker-than-expected EBITDA margin.

Stronger Sequentially on Better Downstream Margin

Sequentially, IOI Corp’s 2QFY19 revenue was flattish at RM1.9bn (+0.3% qoq), while PBT increased by 22.4% qoq to RM239m. The higher profit was mainly due to higher contribution from the resource-based manufacturing segment, but partially offset by the lower contribution from the plantation segment. After excluding forex and other one-off items, 2QFY19 core net profit increased by 5.1% qoq to RM189.3m.

Source: Affin Hwang Research - 21 Feb 2019