Result

• IOI Corp registered a net profit of RM16m for its 2QFY17. After adjusting for: 1.) Value loss on derivative instruments, RM23.4m; and 2.) Foreign currency translation loss on foreign denominated borrowings of RM330m, we derived core net profit of RM380m, jumped 18.8% qoq and 52.6% yoy. The vibrant performance in 2QFY17 mainly propelled by stellar performance in resource-based manufacturing segment. Meanwhile, 6MFY17’s core net profit soared 25.1% yoy, which mainly attributed by plantation segment that underpinned by higher selling prices in CPO and Palm Kernel.

• Broadly within expectations. The 6MFY16 core net profit of RM700m met 63.8% and 62.1% of our and consensus fully year forecast respectively. We expect 2H earnings to soften to meet full year forecast.

Comment

• Plantations segment buoyed by jump in CPO and Palm kernel selling prices despite lower FFB production. Plantations segment posted revenue of RM646m (+10.5% qoq, +16% yoy) in 2QFY17 with operating profit of RM361m (+ 4.3% qoq, +12.7% yoy). The favorable performance in 2QFY17 was mainly driven by higher selling price in both CPO (+12.34% qoq, +29.1% yoy) and Palm Kernel (+10.72% qoq, +76.7% yoy) that outweighed a slide in FFB production (-5.2% qoq, -11.47% yoy). Cumulatively, plantation segment 6MFY17’s operating profit surged 32.6% yoy, back by higher selling price in CPO (+22.3% yoy) and Palm kernel (+83.24% yoy) despite lower FFB production (-10.6% yoy).

• Conspicuous performance in resource-based manufacturing bolstered earnings in 2QFY17 further underpinned by higher margin. Resource-based manufacturing posted higher revenue of RM3583m in 2QFY17, increased 10.2% qoq and 22.9% yoy. Similiarly, 2QFY17’s operating profit surged 59.8% qoq and 59.4% yoy in view of higher margin (+1.5pts qoq + 1.1pts yoy) of 5%, which derived from refining sub-segment. However, cumulatively 6MFY17’s operating profit slid 4% yoy to RM273m. This was mainly attributed by lower sales volume and lower margin derived from olechemical sub-segment as a consequences of high palm kernel feedstock cost.

• Looking forward, we believe the group’s performance will be supported by recovery in FFB production coupled with firm CPO and Palm Kernel prices. On the other hand, resource-based manufacturing segment would be affected by higher Palm kernel price. We understand that olechemical sub-segment is facing continued high palm kernel price coupled with the uptrend in utility cost in which the group intends to continuously invest in capital expenditure to improve efficiencies and cost savings. Meanwhile, as for the specialty oils and fats sub-segment, the group saw business performance has improved steadily since the lifting of RSPO certification.
• Declared interim dividend of 4.5sen per share with ex-date on 3rd March 2017. This translates into a dividend yield of 0.97%.

Earnings Outlook/Revision

• No change to our earnings forecast for FY17 and FY18.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM4.36. Our target price is pegged at PE of 25x FY17F EPS. The assigned PER is at 5-year historical mean PE of the Group and equivalent to valuation of other big-cap planters. At this junction, we do not foresee any immediate catalyst to drive the Group’s share price with unfavourable risk-reward.

Source: JF Apex Securities Research - 21 Feb 2017