Period  2Q14/1H14

Actual vs. Expectations Excluding forex loss of RM235m and inventory write down of RM6m, the 1H14 core net profit (CNP) of RM805m is better than expected as it made up 54% of consensus forecast (RM1.48b) and 62% of ours (RM1.29b).

 We have underestimated the downstream division margins which have improved significantly from 3.9% in 1H13 to 7.9% in 1H14. We believe that the better margin could be caused by better performance in the specialty oils and fats (SOAF) and oleo chemicals (OLEO) sub-segments as the global economy improves, which should lead to higher demand for these products in the European and US market.

Dividends  Single tier dividend of 8.0 sen was announced. This is better than our earlier estimate of 7.0 sen and we reckon that this could be due to stronger cash flow enjoyed by IOICORP after the demerger with IOI Properties Group Berhad.

Key Results Highlights YoY, 1H14 CNP increased 35% to RM805m due to stellar performance from downstream activities (EBIT +93% to RM478m). However, the earnings growth is capped by lower EBIT from plantation division, which declined 19% to RM570m. Note that the effective CPO prices declined by 8% to RM2386/MT.

 QoQ, 2Q14 CNP improved 4% to RM410m due to strong earnings growth from downstream division (EBIT +19% to RM260m) and plantation (EBIT +22% to RM314m). Better plantation earnings is consistent with higher CPO prices (+3% to RM2419/mt) and seasonally higher FFB production (+16% to 1.01m mt).

Outlook  Management expects: (i) plantation division to perform better YoY in FY14, (ii) SOAF sub-segment outlook to remain positive, and (iii) OLEO subsegment to perform well. We concur as we believe the plantation division should benefit from higher CPO prices, currently hovering above RM2700/mt.

Down-stream division margins should improve in line with a better global economy outlook.

Forecast  FY14E CNP is increased by 4% to RM1.35b while FY15E CNP is increased by 5% to RM1.55b, respectively. We have increased our margins assumption for the downstream division.

Rating Maintain OUTPERFORM

IOICORP is the biggest and most efficient integrated palm oil player. Note that IOICORP’s FFB yield at 24.46mt per ha is the highest among big cap planters.

Valuation  We have increased our Target Price to RM5.15 (from RM4.95) based on an unchanged Fwd. PER of 21.2x on higher FY15E EPS of 24.3 sen (from 23.4 sen).

Risks to Our Call

 Lower-than-expected CPO prices.

 Lower-than-expected margins for its downstream division.

 Lower-than-expected earnings from property division.

Source: Kenanga