IOI Corporation (IOICORP)’s FY16 Core Net Profit of RM901m missed consensus and our forecast at 83% and 92%, respectively as FFB production missed, making up 91% of our forecast. Second interim dividend of 4.5 sen announced for full-year DPS at 8.0 sen, in line with our forecast. We lower FY17E earnings (-4%) and roll forward to CY17 for lower TP of RM4.67 (from RM4.80). MARKET PERFORM call maintained.

FY16 misses forecasts with Core Net Profit (CNP*) at RM901m, coming in at 83% of consensus’s RM1.09b and 92% of our RM978m estimates. FY16 FFB production missed as well, making up 91% of our full-year forecast. A second interim dividend of 4.5 sen was announced for FY16 DPS of 8.0 sen, matching our forecast.

Double blow from RSPO suspension and production. YoY, FY16 CNP fell 21% as Plantation EBIT declined 3% on flat CPO prices (+1%) and lower production (-11%). Downstream EBIT weakened 8% on softer margins (4%, from 5%) from higher palm kernel (PK) cost. QoQ, CNP improved 56% which we think is mainly due to lower tax charge (-70%) as we note that 4Q16 EBIT declined 26% against 3Q16. Better CPO prices (7%) and volume (+37%) failed to offset weaker downstream margins (from 3% to 2%) as specialty oils and fats contribution softened with the RSPO certificate suspension.

Suspension lifted, but damage is done. Although the RSPO suspension was lifted effective 8th Aug 2016, recent comments by major buyers indicate that there is little urgency to resume business with IOICORP until tangible progress is made on resolving its suspension issues. Meanwhile, we think that new MNC clients could also be dissuaded from entering into business given the reputation damage from the suspension. Hence, we think that IOICORP downstream recovery may not be seen until 2H17, although earnings should see some improvement in 2Q17 with the recovery of CSPO premiums.

Reduce FY17E CNP by 4% to RM1.18b as we lower our FFB yield assumptions to reflect slower-than-expected production recovery. We also introduce our FY18E CNP of RM1.34b.

Maintain MARKET PERFORM with lower TP of RM4.67 (from RM4.80) after accounting for earnings downgrade and rolling forward our valuation base year to CY17 (from FY17) for lower Fwd. EPS of 19.7 sen (from 20.3 sen). Our Fwd. PER is unchanged at 23.7x, implying a valuation basis of -0.5SD. We think this is justified as downstream earnings recovery could be slow in 1H17, while upstream performance should be in line with the sector as FY17-18E FFB growth of 6-7% is close to sector average CY16-17E growth of 3-9%.

Source: Kenanga Research - 24 Aug 2016