Result

• IOI Corp registered a net profit of RM362.8m for its 1QFY18. After adjusting for: 1.) Fair value gains on derivative instruments, RM4m; and 2.) Foreign currency translation gains on foreign denominated borrowings of RM68.6m, we derived a core net profit for the period of RM290.2m, up 13.8% qoq but dropped 12.9% yoy.

• Quarterly performance was underpinned by better production which outweighed retreat in CPO average selling price (ASP). Meanwhile, on yoy basis, the performance was mainly bogged down by higher tax expenses.

• Within expectations. The 3MFY17 core net profit of RM290.2m meets 27.8% and 24.2% of our and consensus full year net earnings forecast respectively.

Comment

• Plantation segment lifted by higher production which outweighed the slide in CPO ASP on quarterly basis. Plantation segment’s 1QFY18 revenue and operation profit increased 5.4% qoq and 15.8% qoq respectively, backed by higher FFB production (+8.8% qoq), outweighing lower CPO ASP (-5.8% qoq). However, on a yearly basis, Plantation segment’s 1QFY18 revenue inched up marginally by 1% yoy but operating profit edged down 2.3% yoy. The unfavorable performance was mainly attributed by lower FFB production (-0.4% yoy) coupled with lower Palm kernel ASP (-12.3% yoy) that mitigated improvement in CPO ASP (+7.3% yoy)
• Resourced-based manufacturing performance lifted by higher sales volume and margin. Resourced-based manufacturing’s 1QFY18 revenue surged 13.7% qoq and 27.1% yoy. Similarly, 1QFY18’s operating profit soared 109.2% qoq and 46.4% yoy. This was mainly due to higher margins from the oleochemical and refining sub-segments as well as higher sales volume from the oleochemical sub segment. We believe higher margins due to lower feedstock price as palm kernel price softened.
• Plantation segment is expected to continue doing well. Looking forward, performance of the plantation segment is underpinned by higher FFB production in view more young palm trees reaching the prime production age. Meanwhile, prevailing strong CPO and palm kernel prices could render better margin.

• Going forward, we expect oleochemicals sub segment under resource-based manufacturing division to continue recovering thanks to lower and more stable feedstock prices. In addition, specialty oil and fats sub-segment is expected to experience higher business volume from multinational customers in view of the impending trans-fat ban in the US in June 2018.
• To recap, the group has entered into a definitive sale and purchase agreement with Bunge Limited (Bunge) to sell a 70% controlling stake in IOI Loders Croklaan (Loders) and its related businesses for a total consideration of Euro 297 million plus US Dollars 595 million, subject to certain adjustments to be determined at the closing of the transaction. In 1QFY18, the discontinued operation businesses recorded a revenue of RM1991.7m (+32.1% yoy) with an operating profit of RM35.7m (-50.1% yoy). The lacklustre performance was attributed by eroded operating margin of 1.8% (-2.9 pts yoy). Nevertheless, discontinued operation businesses’ revenue and operation profit made up 48.2% of total resources based manufacturing revenue and 21.8% operating profit respectively. On the other hand, on a group level, the discontinued operation businesses’ operating profit in 1QFY18 contributed 7.6% for the group’s total operating profit.

Earnings Outlook/Revision

• We keep our earnings forecasts for FY18 and FY19 unchanged.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM4.16. Our target price is pegged at PE of 25x FY18F EPS. The assigned PER is at 5-year historical mean PE of the Group and in line with valuations 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 - 20 Nov 2017