The RSPO Board of Governors endorsed the lifting of suspension on IOICORP effective 8-Aug-16. We were not surprised as we earlier noted that the required documents had been filed and was pending feedback. While the news come as a positive, earnings recovery may not be immediately felt given loss of clients and reputational damage. We up our FY17E earnings by 5% and increase our TP to RM4.80. MARKET PERFORM call maintained.

Suspension lifted. The RSPO Board of Governors has endorsed the recommendation of its Complaints Panel to lift the suspension of RSPO Certification for IOI Corporation (IOICORP), effective from 8 August 2016. However, the implementation of IOICORP’s action plan will be subject to independent ground verification, with potential for another suspension should the verification team “find significant failures in the implementation” of IOICORP’s commitments to RSPO in correcting deficiencies leading to the original suspension. IOICORP shall continue submitting quarterly reports for 12 months, following which another ground verification and review will be done by RSPO.

Not quite business as usual. We were not surprised by the announcement as we noted in our 10 Jun 2016 Company Update report on IOICORP that the company had submitted its plans and assessments for approval, and we were optimistic that the suspension would be resolved by 1H17. While the news come as a positive boost to sentiment, we note that earnings recovery may not be felt immediately given the loss of major clients such as Unilever, P&G, and Cargill, among others. We believe full client recovery may take time, while new MNC clients could be dissuaded given reputation damage suffered from the suspension. However, earnings from mid-1Q17 should see improvement with the recovery of CSPO premiums.

FY17E CNP increased 5% to RM1.29b after reflecting recovery of CSPO premiums.

Drought impact still felt. We think that the coming 4Q16 results are likely stronger QoQ but flat-to-weaker YoY. QoQ, 4Q16 CPO prices have improved 8% while FFB production rose 36%. Meanwhile, YoY 4Q16 CPO prices rose 19% but production dropped 20%. Full-year production has also weakened by 12%, reflecting the delayed impact of mid-2015 droughts.

Maintain MARKET PERFORM with higher TP of RM4.80 (from RM4.57) post-earnings upgrade. Our TP of RM4.80 is based on an unchanged Fwd. PER of 23.7x on higher FY17E EPS of 20.3 sen (from 19.3 sen). Our Fwd. PER implies an unchanged -0.5SD valuation as earnings recovery postsuspension could take time, while lagged drought impact could continue to dampen production growth until 2H17. However, the lifted suspension eases investors’ uncertainty, which should limit further share price downside. Hence, we maintain our MARKET PERFORM call on IOICORP.

Source: Kenanga Research - 8 Aug 2016