Period

2Q16/1H16

Actual vs. Expectations

IOICORP’s 1H16 core net profit (CNP*) at RM568m was within consensus expectations (RM1.08b) at 52%. We deem the result which is at 44% of our estimate as broadly within expectation (RM1.29b) as we expect strengthening CPO prices to lead to better earnings in 2H16.

Dividends

An interim dividend of 3.5 sen was announced, making up 32% of expected 11.0 sen DPS for FY16. This is within expectation as the company tends to pay higher dividend in 4Q.

Key Results Highlights

YoY, 1H16 CNP declined 10% as downstream EBIT declined 13% to RM302m on softer margins in the refining and specialty fats businesses. Meanwhile, Plantation EBIT was flat (+1% to RM583m) despite lower CPO prices (-4% to RM2,128/metric ton (MT)) and FFB production (-3% to 1.90m MT) due to higher extraction rates and better PK prices (+2% to RM1,490/MT).

QoQ, 2Q16 CNP fell 29% to RM236m, partly due to higher tax charge (+124% to RM140m). Operating profit fell only 3% to RM438m as downstream EBIT dropped 41% to RM112m on lower oleochemicals and specialty fats margins. However, this was partly by Plantation EBIT, which improved 22% to RM320m on stronger CPO prices (+1% to RM2,137/MT).

Outlook

Management expects CPO prices to trend upward and remain firm, in line with our short-term expectation of rising CPO prices. However, this could be offset by below-average FFB growth prospects (+4% vs. sector average of +6%).

We expect downstream margins to gradually strengthen as rising CPO prices trigger the Malaysian CPO export duty, which should improve refining margins. However, other downstream activities remain challenging in light of weak crude oil prices.

Forecast

No change to our FY16-17E CNP.

Rating

Maintain MARKET PERFORM

We maintain our MP call as rising CPO prices is offset by soft production outlook, while downstream operations remain challenging despite potential recovery in refining margins.

Valuation

We raise our Target Price to RM4.96 (from RM4.52) as we apply a higher Fwd. PER of 24.1x (from 22.0x) on unchanged CY16E EPS of 20.6 sen.

Our Fwd. PER is based on mean valuation (from - 1.0SD valuation) as we believe rising CPO prices and better refining margins should help ease concerns on poor production outlook and soft crude oil prices.

Risks

Lower-than-expected CPO prices.

Lower-than-expected margin for its downstream division.

Source: Kenanga Research - 22 Feb 2016