IOI Corp’s 1QFY20 core net profit was stronger qoq but weaker yoy at RM168m, accounting for 21% of our previous FY20 forecast. We expect better quarters ahead for IOI Corp, driven by a recovery in CPO prices. We raise our FY20-22E core EPS by 5-11%, mainly to account for higher CPO price assumptions of RM2,350-2,650/MT. As such, we raise our DCF-derived target price to RM4.62. Maintain HOLD.

1QFY20 Core Net Profit at RM168m, Down 9.3% Yoy

IOI Corp’s 1QFY20 revenue was lower by 5.3% yoy to RM1.8bn, due to a lower contribution from the resource-based manufacturing division (-5.8%) but partially mitigated by a slightly higher contribution from the plantation division (+3.1%). However, IOI Corp’s PBT (which is inclusive of a net foreign-currency translation loss on foreign currency-denominated borrowings as well as fair-value gains on derivative financial instruments from the resource-based manufacturing division) improved slightly by 1.7% yoy to RM198.6m, attributable to the better performance from the resource-based manufacturing division (due to higher sales volumes and margins from its refining sub-segment) but partially offset by lower profit from the plantation division (due to weaker CPO and PK ASPs). For 1QFY20, IOI Corp’s CPO and PK ASPs were lower at RM2,014/MT (1QFY19 CPO ASP: RM2,236/MT) and RM1,126/MT (1QFY20 PK ASP: RM1,766/MT). After excluding forex and other one-off items, 1QFY20 core net profit declined by 9.3% yoy to RM168m, accounting for 21% of our previous forecast and 20% of the street’s FY20E expectations.

Stronger Sequentially

Sequentially, IOI Corp’s 1QFY20 revenue increased to RM1.8bn (+2.1% qoq), while PBT surged >100% qoq to RM198.6m (1QFY20 reported a higher fair-value loss on derivative financial instruments and forex loss). The higher profit was due to better performances from both the plantation and resource-based manufacturing divisions. After excluding forex and other one-off items, 1QFY20 core net profit increased by 8.7% qoq to RM168m.

Recovery in CPO Prices to Drive Future Earnings

We expect IOI Corp’s future earnings to improve, mainly driven by the recovery in CPO prices. We raise FY20-22E core EPS by 5-11%, after taking into account a higher contribution from the plantation division. For IOI Corp, we expect CPO prices to average at RM2,350-2,650/MT for FY20-22E, up from RM2,250-2,450/MT previously. In our view, the growth in demand for palm-oil products should be stronger than the production growth rate. This should help to lower the global palm-oil inventory level and thus boost prices.

TP Raised to RM4.62, Maintain HOLD Rating on IOI Corp

After our earnings forecast revisions, we raise our DCF-derived TP to RM4.62 (from RM4.34 previously). Given the potential upside of 3.8% to our new TP for IOI Corp, we keep our HOLD rating on the stock.

Key Risks

Key upside/downside risks include: 1) a 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 - 27 Nov 2019