Results  below  expectations.  In annualized terms, IOI Corp's 1QFY13 core earnings  were 18.3% below our forecast and 16.9% below consensus. We note that consensus'  estimates  for  FY13  have  been  trimmed  by  8.1%  to  RM2,037.0m  since  the  group  released  its  4QFY12  results.  Its  core  earnings  came  in  at  RM2,217.0m  a  quarter  ago  compared with our forecast of RM2,074.0m back then.

Revival at plantation earnings as expected. By segmental breakdown, IOI's plantation  EBIT jumped by 31.1% q-o-q to RM377.3m as its FFB production surged 33.9% due to  the high crop season and more importantly, the recovery in Sabah state's production in  the September quarter. The group's realised price dipped 9.2% to RM2,941 per tonne  but the lower price was more than made up for by the higher production. However, on y-o-y basis, IOI's performance was still below that of last year. Segment earnings were  30.2% lower as group production fell 8.6% while realized price eased by 6.6%.

Better days at downstream segment. IOI's downstream performance, which showed a  sharp q-o-q improvement, nearly doubled to RM66.4m. Refining margins improved from  the early part of this year. Even compared with last year, this performance was sharply  better. Management attributed the improvement to better margins for oleochemicals and  specialty fats as well as fair value gains in forex and commodity forward contracts.

Maintaining forecast. We are keeping our forecasts for FY13 at RM2,074.1m and FY14  at RM2,211.2m. The stock is trading at 15.3x and 14.3x forward earnings. While there is  some upside potential to our fair value, we do not believe IOI will outperform the sector  given its high proportion of fully mature and old trees.

Rising debt. We note that IOI's net debt has increased substantially over the past four  quarters,  rising  from  RM2,330.4m  in  1QFY12  to  RM4,008.3m  currently.  This  puts  its  gearing at 31.8%, largely due to the group's growing focus on property development.

 Source: OSK