Period  2Q15/1H15

Actual vs. Expectations  IOICORP’s 1H15 core net profit (CNP*) of RM631m met expectations, making up 51% and 53% of consensus estimate (RM1244m) and ours (RM1199m), respectively.

 Note that we have excluded forex losses of RM396m from our CNP calculation as this is a non-cash item arising from unrealised fair value change in forex forward contracts in its downstream segment.

Dividends  As expected, an interim dividend of 4.5 sen was announced, making up 28% of our FY15E expected dividend of 15.9 sen (3.6% yield).

 This is within our expectations as IOICORP traditionally pays out >50% of its full-year dividend in the 4Q.

Key Results Highlights  YoY, 2Q15 CNP dropped 21% as downstream segment EBIT tumbled 54% to RM218m. 1H15 downstream margins halved YoY from 7.9% to 3.8%, likely due to excess capacity in the oil refining industry. Meanwhile, Plantations earnings were flat (+1%) at RM578m as FFB volume growth of 4% to 1970m metric tons (MT) and Oil Extraction Rate (OER) improvement from 21.1% to 21.5% managed to offset lower CPO prices (-7% to RM2,221/MT).

 QoQ, 2Q15 CNP improved 73% to RM400m mainly due to plantation earnings improvement (EBIT +6% to RM297m) arising from better cost efficiency as EBIT margins improved by 4ppt to 14%. Meanwhile, downstream earnings was flat (EBIT +1% to RM110m) despite slightly better margins from 3.7% to 3.9%.

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 an indication that the outlook for this sub-division is challenging.

 For plantation, management expects flattish CPO prices between RM2,150-RM2,370/MT in 1Q15, in line with our expected CPO price of RM2,200/MT. While management is optimistic on FFB growth from its maturing Indonesian operations, we think this will be limited by flat growth in Malaysia. Overall, we expect FY15E FFB growth at 4.4%, lower than the sector average of 6.5%.

Forecast  Maintain our FY15E-FY16E estimates.

Rating Maintain UNDERPERFORM Downstream division could 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. We expect CPO prices to weaken to RM2,200/MT in 2HCY15, offsetting its FFB growth potential (4.4%, lower than the sector average of 6.5%).

Valuation  Maintain our Target Price of RM4.40 based on an unchanged Fwd. PER of 23.1x on CY15E EPS of 19.0 sen. Our target Fwd. PE of 23.1x is based on -0.5SD valuation due to expected flattish CPO prices and weaker outlook on its downstream operations which made up 35% of FY14A EBIT but only 26% of 1H15 EBIT.

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

 Better-than-expected margin for its downstream division. 

Source: Kenanga