Period

3Q15/9M15

Actual vs. Expectations

IOICORP’s 9M15 core net profit (CNP*) of RM898m came in within expectations at 78% and 75% of consensus’ estimate (RM1153m) and ours (RM1199m), respectively.

Note that we have excluded 3Q15 forex losses of RM447m from our CNP calculation as this is a noncash item arising from translation losses on its foreign borrowings.

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 9M15 CNP fell 22% as downstream segment’s EBIT roughly halved to RM321m on compressed margin, likely due to excess refining capacity in the industry. Plantation segment’s EBIT fell as well (by 11% to RM770m) as CPO prices declined by 9% to RM2,229/metric ton (MT) while FFB production was relatively flat (-1% to 2.65m MT).

QoQ, 3Q15 CNP dropped 33% to RM266m as Plantation segment’s EBIT slid 35% on weak FFB production (-32% to 0.68m MT). Marginally higher CPO prices (+3% to RM2,247/MT) failed to offset the lower production.

Outlook

For the plantation side, management expects rangebound CPO prices of between RM2,050-RM2,250/MT in 4Q15, in line with our forecast FY15 CPO price of RM2,200/MT. While management is optimistic on FFB growth from its maturing Indonesian operations, we think this could be limited by flat growth in Malaysia. Hence, we expect FY15 FFB growth at 4%, roughly in line with the sector average of 5%. Meanwhile, IOICORP’s downstream outlook remains challenging going forward due to rising capacity coming on-stream in the industry.

Forecast

Maintain our FY15E-FY16E estimates.

Rating

Upgrade to MARKET PERFORM

We upgrade our call on IOICORP to MARKET PERFORM (from UNDERPERFORM) given the recent sharp sell down of its shares. We believe that the market has priced-in major negatives like the potential exclusion from the upcoming list of Syariah-compliant securities in late-May. IOICORP will be converting a portion of its conventional loans to Islamic financing to comply with the Syariah criteria. If this is done before 30th June, we reckon that they could return to the Syariah index during the Dec review, as its financial year end is June. If so, this could help to limit further selling pressure given the management’s commitment to maintain its Syariah status.

Valuation

Maintain our Target Price of RM4.40 based on an unchanged Fwd. PER of 23.1x on CY15E EPS of 18.8 sen. Our target Fwd. PE of 23.1x is based on -0.5SD valuation due to expected flattish CPO prices and weaker outlook for its downstream operations which made up 39% of FY14 EBIT but only 28% of 9M15 EBIT.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 15 May 2015