Period  4Q14/FY14

Actual vs. Expectations IOICORP’s FY14 core net profit (CNP) of RM1.39b is below consensus as it made up only 90% of consensus forecast (RM1.54b). However, it is within ours, at 95% of our estimate (RM1.46b).

 We believe that consensus may have overestimated the downstream division’s margin which had declined in 4Q14 to only 3.8% (against 4Q13’s 4.7% and 3Q14’s 7.3%). This could be caused by higher feedstock cost as CPO price was strong at that time.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, FY14 CNP increased 13% to RM1.39b due to better performance from downstream division (EBIT increased 30% to RM787m), benefitting from higher margin and higher sales volume from oleochemicals, specialty oils and fats subsegments. Plantation division’s EBIT increased by 12% to RM1.19b on better CPO prices of RM2509/MT (+3% YoY).

 QoQ, 4Q14 CNP declined 31% to RM242m due to lower earnings from downstream division (EBIT fell 49% to RM104m). This is due to lower EBIT margin of 3.8% against 3Q14’s 7.3% on feedstock cost increase. This resulted in razorthin refinery sub-segment margin in 4Q14.

Outlook  Management expects higher demand from biodiesel given the current low CPO prices. Downstream division businesses are expected to perform satisfactorily.

 However, we think FY15E earnings growth is likely to be limited to 5% due to the low CPO prices currently.

Forecast  Maintain FY14E CNP of RM1.46b. We also maintain FY15E CNP of RM1.47b.

Rating Maintain MARKET PERFORM

Share price upside is limited due to low CPO prices currently. However, downside is limited by its high dividend yield of 3.9%. On the recent threat from potential Indonesian limit on foreign ownership, IOICORP’s exposure is limited to 11,323 ha or only 7% out of its total planted area.

Valuation  Maintain our Target Price of RM5.30 based on an unchanged Fwd. PER of 23.1x on CY15E EPS of 22.9 sen. Our target Fwd. PE of 23.1x is based on -0.5SD valuation as IOICORP is poised to lose its Shariah status by the end of the year.

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

 Lower-than-expected margin for its downstream division.

Source: Kenanga