Result

• IOI Corp recorded a net profit of RM240m in 3QFY19. After adjusting for: 1.) Fair value gains on derivative instruments of RM22.2m; 2.) Foreign currency translation gains on foreign denominated borrowings of RM67.3m; and 3.) Foreign currency losses on foreign denominated deposits of RM10.1m, we derived a core net profit of RM160.6m, which tumbled 19.8% qoq and 37.7% yoy.

• Both lackluster QoQ and YoY performances were due to unfavourable performance in plantation segment (PS) which was partly mitigated by resources-based segment (RBS).

• Below expectations. 9MFY19 core net profit only meets 59.7% and 59.3% of ours and consensus full year net earnings forecast respectively due to continuous soft CPO price.

Comment

• Plantation’s QoQ performance was bogged down by lower FFB production. After adjusting fair value changes on other investments and biological assets, 3QFY19 PS’s profit down 12% qoq to RM129.2m, no thanks to lower FFB production (-8.7% qoq)

• Plantation’s YoY performance was hit by lower ASP despite slight improvement in FFB production. Operating profit decreased 44% yoy. Unfavourable performance was due to soft averages selling price (ASP) of CPO (-22.4% yoy) and PK (-40.4 yoy) despite higher FFB production (+3.6% yoy).
• 9MFY19 Plantation segment’s performance whittled by lower ASP and FFB production. Operating performance tumbled 54.9% yoy to RM399.4m in view of lower ASP (CPO:-21.4% yoy /PK: -38% yoy) and FFB production (-5.8% yoy)
• Resourced-based manufacturing’s QoQ performance was lifted by refining sub-segment. Operating profit improved 43.2% qoq was mainly due to higher margins from refining sub-segment.

• Resourced-based manufacturing’s YoY performance was underpinned by refining sub-segments. Operating profit surged 144% yoy as a result of higher volume and margins in refining sub-segments coupled with contribution from associate (Bunge Loders Croklan Group). On the same note, 9MFY19 RBM’s operating profit up 55% yoy.

• Looking forward, the group expects lower FFB production growth in 4QFY19 given changes in the seasonality of Malaysian production pattern and lower harvesting productivity during Ramadan. As such, plantations segment is expected to have unfavourable performance in 4QFY19 especially with prevailing CPO prices.
• Under Resource-based manufacturing segment, the group expects oleochemical sub-segment to perform well with favourable feedstock cost and good demand. Steady demand for fatty acids and fatty esters would render a support to the growth of oleochemical sub segment.
• Bunge Loders Croklaan (30%-owned by the group, a specialty fat associated company) is expected to see a strong performance under the confectionery and nutrition categories in view of higher sales volume. As such, RBM segment is expected to perform well.

Earnings Outlook/Revision

• We tweak down our earnings forecast for FY19 by 15.7% after lowering down FFB production and margin forecast. Meanwhile, we keep our earnings forecast for FY20 unchanged.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM4.37. We peg our valuation at PER of 26x FY20F EPS. The assigned PER is -0.25 SD of the group’s 2-year historical mean PE.

Source: JF Apex Securities Research - 23 May 2019