IOI Corporation (IOICORP)’s 9M16 Core Net Profit (CNP*) RM698m (-22% YoY) missed consensus and our forecast at 64% and 57%, respectively, on weaker FFB volume and CPO prices. No dividend declared, as expected. FY16-17E CNP reduced by 21-9% to RM0.98-1.23b, reflecting lower RSPO premiums. We maintain our UNDERPERFORM call with lower TP of RM4.05 (from RM4.25).

Below expectations. 9M16 CNP came in under consensus (RM1.01b) and our forecast (RM1.23b), at 57% and 64%, respectively. This was mainly due to weaker FFB volume (-9% to 2.43m MT) and lower CPO prices received (-3% to RM2,173/metric ton (MT)) as well as softer downstream sales volume.

Drought impact. Notably, 3Q16 Plantation segment’s operating profit declined by 48% quarter-on-quarter (QoQ) as FFB volume plunged 44% on severe production impact from last year’s droughts in Sabah and Indonesia. 3Q16 Resources-based Manufacturing (downstream) segment’s operating profit improved 7% QoQ as margins rose 0.5% to 4.3% on higher specialty products’ mix. Against 2015, however, 9M16 downstream profit was lower (-5%) as margins declined 0.5% to 4.8% on softer sales volume and refining margins.

Sustained RSPO issues. Recall on 9-May, IOICORP announced that it had filed a challenge with the Justice of Peace in Zurich, Switzerland against RSPO relating to its suspension. In our Kenanga Today report (10-May), we mentioned that the news was slightly negative as it could be a precursor to legal action. This seems to indicate that the RSPO suspension could last beyond the original expectation of several months and likely beyond FY16. Combined with the loss of major MNC clients, we think investor sentiment on IOICORP will remain severely dampened for the duration of the suspension.

Reduce FY16-17E CNP by 21-9% to RM0.98-1.23b to reflect the effect of lower RSPO premium on IOICORP’s products. We trim our estimated CPO selling prices by 1%. We also lower average downstream product premium by 20%.

Maintain UNDERPERFORM with lower TP of RM4.05 (from RM4.25) as we: (i) downgrade FY16-17E earnings, and (ii) roll forward our valuation base year from CY16E to FY17E. Our TP is based on Fwd. PER of 21.0x applied to updated FY17E EPS of 19.3 sen (from 20.3 sen). Our valuation basis is maintained at -1.5SD, in line with our UNDERPERFORM call reflecting deteriorating investor sentiment and potential earnings risk from loss of customers due to the RSPO suspension. Furthermore, FY16E negative FFB growth outlook at -2% (vs. sector average +6%) could limit near-term upside. 

Source: Kenanga Research - 19 May 2016