Period

1Q16/3M16

Actual vs. Expectations

IOICORP’s 1Q16 core net profit (CNP*) at RM332m is within our (RM1.29b) and consensus (RM1.09b) forecasts, hitting 26% and 30% of full-year forecasts, respectively. Reported net loss of RM719m was actually included RM1.05b of unrealised fair value and translation losses.

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 3M16 CNP improved 44% as downstream EBIT improved 59% to RM190m on higher margins from its oleochemicals and refining businesses. However, this was slightly offset by weaker Plantation earnings (-7% to RM262m) as CPO prices declined 6% to RM2,119/metric ton (MT) while FFB production was flat at 968k MT.

QoQ, 1Q16 CNP improved 39% as downstream EBIT increased 91% on oleochemicals and refining margins recovery, while Plantation segment’s EBIT was also higher by 11% as FFB volume growth (+9%) was sufficient to offset lower CPO prices (-4%).

Outlook

Management expects CPO prices to be sustained at the current level with potentially higher prices in 1QCY16. This is in line with our expectations of CY15-16E CPO prices at RM2,200-2,400/MT. However, IOICORP’s FY16E FFB growth at 4% is slightly below sector average (6%), which may limit upside.

We expect downstream operations to remain challenging in light of weak crude oil prices, but IOICORP’s expansion up the value chain should gradually improve downstream margins.

Forecast

No change to our FY16-17E earnings forecast.

Rating

Maintain MARKET PERFORM

No change to our MP call due to IOICORP’s average FFB growth and challenging short-term downstream outlook. However, IOICORP’s possible re-inclusion into the Syariah-compliant list at the end of the month could be a mid-term catalyst.

Valuation

We raise our Target Price to RM4.52 (from RM4.36) as we roll forward our valuation base year to CY16E for an updated EPS of 20.6 sen (from 19.8 sen) applied to an unchanged Fwd. PER of 22.0x. Our target Fwd. PER of 22.0x reflects a -1.0SD valuation which incorporates neutral FFB growth and challenging short-term downstream prospects.

Risks

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 17 Nov 2015