Period

4Q15/FY15

Actual vs. Expectations

IOICORP’s FY15 core net profit (CNP*) of RM1.14b exceeded consensus’ forecast (RM1.06b) at 107% but met ours (RM1.20b) at 95%.

Note that we have excluded 4Q15 forex losses of RM125m from our CNP calculation as this is a noncash item arising from translation losses on its foreign borrowings.

Dividends

Dividend of 4.5 sen was announced, bringing FY15 dividend to 9.0 sen. However, this only made up 56% of our forecasted 16.0 sen or a core dividend payout ratio of 50%, which is well below our expected 85%.

Key Results Highlights

YoY, FY15 CNP declined 18% to RM1.14b as downstream segment’s profit was almost halved (-47% to RM420m) due to soft refining margins. Plantation segment’s EBIT also fell (-15% to RM1.01b) as CPO prices declined 11% to RM2,220/MT while FFB growth was flat at +1% to 3.54m MT.

QoQ, 4Q15 CNP declined 11% to RM238m after excluding RM43.2m one-off gain on land disposal. Otherwise, Plantation segment’s EBIT would have improved 23% to RM236m on higher FFB production (+30% to 0.89m MT) while downstream EBIT was slightly lower (-4% to RM99m) due to slightly lower refining margins.

Outlook

For the plantation side, management expects flat CPO prices in the next three months, which is below our forecasted FY15-16E CPO price of RM2,200- RM2,400/MT. Nevertheless, our flat FFB growth outlook for IOICORP at 1% (against sector average of 8%) could limit earnings’ upside.

Forecast

We maintain our FY16E numbers, and introduce our FY17E CNP forecast of RM1.34b.

We also revise down both our FY16-17E dividend payout ratios to 55% from 85% to reflect the sharply lower dividend payout ratio in FY15.

Rating

Downgrade to MARKET PERFORM (from OUTPERFORM)

We downgrade our call to MARKET PERFORM (from OUTPERFORM) due to the lacklustre near-term CPO outlook and its low FFB growth prospects, which is below sector’s average. We also opine that the lowerthan- expected dividend payout may result in weak short-term sentiment, which may offset the upside on IOICORP’s potential re-inclusion into the Syariahcompliant list.

Valuation

We lower our Target Price to RM4.36 (from RM4.50) based on a lower Fwd. PER of 22.0x (from 23.1x) on CY15E EPS of 19.8 sen. Our target Fwd. PER of 22.0x reflects a lower -1.0SD valuation (from -0.5SD) which we believe is justified by weak FFB growth prospects as well as substantially lower dividend payout expectations going forward.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 25 Aug 2015