Period  1Q15

Actual vs. Expectations IOICORP’s 1Q15 core net profit (CNP) of RM231m is below expectation as it made up only 17% of consensus forecast (RM1.39b) and 16% of our estimate (RM1.46b).

 We believe that the variance is caused by worsethan-expected downstream division’s margin which had declined to only 3.7% in 1Q15 (against 1Q14’s 6.9% and 4Q14’s 3.8%). This could be caused by excess capacity in the refining industry as more refinery capacity starts operations in Indonesia.

Dividends  As expected, no dividend was announced.

Key Results Highlights YoY, 1Q15 CNP tumbled 41% to RM231m as downstream division EBIT plunged 50% to

RM109m. As highlighted above, 1Q15’s downstream margin has deteriorated significantly to 3.7% against 1Q14’s 6.9%. Plantation earnings improvement of 12% to RM281m as FFB volume growth of 10% to 967k MT is more than enough to cover lower CPO prices of 4% to RM2258/MT.

 QoQ, 1Q15 CNP declined 4% to RM231m as the 5% earnings improvement in downstream division (EBIT +5% to RM109m) was dragged down by lower plantation earnings (EBIT -9% to RM281m). Downstream division benefited from higher revenue (+6% to RM2.94b) on similar low margin. Plantation division was affected by lower CPO prices (-15% to RM2258/MT).

Outlook  Out of three subdivisions within the downstream segment, management expect “specialty oils and fats” and “oleochemicals” sub-divisions to perform well. However, it is silent on the “refinery” division and we view this as a confirmation that the outlook for this sub-division is challenging.

 For plantation, management expects better CPO prices in early 2015 as palm oil production enters its seasonal low and this is in line with our estimate.

Forecast  We have reduced our FY15E-FY16E CNP by 7%-6% to RM1.36b-RM1.37b, respectively, after reducing the EBIT margin for downstream division.

Rating Maintain MARKET PERFORM

Downstream division is set to experience lower margin in FY15 as we believe that the excess capacity in the downstream division is likely to persist for more than a year. However, we expect better CPO prices to benefit the plantation division.

Valuation  Our Target Price is reduced by 7% to RM4.95 (from RM5.30) based on an unchanged Fwd. PER of 23.1x on lower CY15E EPS of 21.4 sen (from 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 end of this month.

Risks to Our Call

 Lower-than-expected CPO prices.

 Lower-than-expected margin for its downstream division.

Source: Kenanga