IOI Corporation (IOICORP)’s 1Q17 CNP at RM328m was in line with expectations at 29% of consensus’ RM1.13b and 30% of our RM1.08b forecast. No dividend declared as expected. We maintain our FY17-18E earnings at RM1.08- 1.30b. Reiterate MARKET PERFORM and TP of RM4.60.

1Q17 meets expectations. 1Q17 CNP came in at RM328m, which was in line at 29% of consensus’ RM1.13b and 30% of our RM1.08b forecasts. FFB production at 914k metric tons (MT) was in line as well, at 27% of our full-year forecast. No dividend was declared as expected.

Price-driven earnings. YoY, CNP was flat (-1%) as weaker downstream EBIT (-41%) was offset by stronger upstream contribution (+32%). CPO price improvement (+16%) beat out weaker FFB production (-6%) due to lingering drought impact. Downstream margins, however, weakened to 3.4% from 6.2% no thanks to higher PK raw material costs. QoQ, CNP jumped 62% as upstream EBIT soared 1.7x on 27% rise in FFB volume. Downstream segment’s EBIT also improved with better volume and likely better demand after the uplifting of suspension on 8-Aug, as margins rose to 3.4% from 2.3%.

Expect gradual downstream recovery. With the lifting of their RSPO suspension we expect IOICORP to record downstream earnings improvement, as clients gradually returned. However, we think bigname MNCs may continue to hold off on purchases from IOICORP until the progress in resolving its suspension issues is deemed ‘tangible’. Meanwhile, we expect upstream performance to be stronger in 1H17 in line with historical trends, where 1H FFB production averaged 57% of full-year production in the last 5 years. All-in, 2Q17 earnings should be robust given supportive CPO prices and a gradual recovery in the downstream segment.

Maintain FY17-18E CNP at RM1.08-1.30b as we deem 1Q17 CNP to be within our forecasts.

Reiterate MARKET PERFORM and TP of RM4.60. Our TP of RM4.60 is based on unchanged CY17E EPS of 16.4 sen applied to Fwd. PER of 25.0x. This implies an unchanged -0.5SD valuation basis. We are comfortable with our valuation basis as high PK prices could drag downstream margins, while continued scrutiny on its sustainability performance could remain a headwind going into the mid-term. However, for the upstream side, we are positive in the short-term due to supportive CPO prices and decent FFB growth prospects of +6%, against the CY16E sector average of +2%

Source: Kenanga Research - 21 Nov 2016