Period  3Q14/9M14

Actual vs. Expectations Excluding gain from the IOI Property demerger of RM1.83b and forex loss of RM0.26b, IOICORP’s 9M14 core net profit (CNP) of RM1.15b is better than expected as it made up 77% of consensus forecast (RM1.50b) and 85% of ours (RM1.35b).

 We have underestimated the downstream division margins which improved significantly from 5.2% in 9M13 to 7.7% in 9M14. We believe that the better margin could be due to better performance in the “specialty oils and fats (SOAF)” and “oleochemicals” (OLEO) sub-segment as the global economy improved.

 Although individual quarter comparison of 3Q14 downstream EBIT margin of 7.3% is lower than 3Q13’s 8.0%, we wish to highlight that this is still much higher than the historical three years range from 1.8% to 4.8%.

Dividends  As expected, no dividend was announced. However, we expect the Company to deliver final dividend of 9.0 sen to bring the total dividend to 17.0 sen for FY14 implying decent 3.3% dividend yield.

Key Results Highlights

 YoY, 9M14 CNP increased 22% to RM1.15b due to stellar performance from downstream division (EBIT +44% to RM684m). However, the earnings growth is capped by lower EBIT from plantation division, which declined 4% to RM877m. Note that FFB volume is down 1% to 2.68m MT while CPO prices declined 0.5% to RM2459/MT.

 QoQ, 3Q14 CNP declined 15% to RM350m due to lower earnings from downstream division (EBIT -21% to

RM205m). This is due to lower EBIT margin of 7.3% against 2Q14’s 9.1% as feedstock cost increased. Plantation earnings declined 2% to RM307m due to seasonally lower FFB production (-22% to 0.79m mt) although the decline is cushioned by higher CPO prices (+8% to RM2602/MT).

Outlook  Management expects CPO prices to be supported at current level due to higher biodiesel mandate in Indonesia and Malaysia. Downstream division businesses are expected to perform reasonably well. Overall, we expect good FY14E earnings growth of 14% for IOICORP to RM1.46b.

Forecast  FY14E CNP is increased by 9% to RM1.46b while FY15E CNP is increased by 5% to RM1.63b, respectively. We have increased our margin assumption for the downstream division.

Rating Maintain OUTPERFORM

The better-than-expected 9M14 earnings and 22% CNP growth should be supportive to its share price in the nearterm.

Valuation  We have increased our Target Price to RM5.40 (from RM5.15) based on an unchanged Fwd. PER of 21.2x on higher FY15E EPS of 25.5msen (from 24.3 sen).

Risks to Our Call Lower-than-expected CPO prices.

 Lower-than-expected margin for its downstream division.

 Lower-than-expected earnings from property division.

Source: Kenanga