IOI Corporation (IOICORP)?s 1H17 CNP at RM693m came in at 61% and 63% of consensus and our forecast, respectively. We deem this broadly within expectations as 1H earnings historically made up 54-60% of full-year, while 2H could be softer on seasonally lower production. Dividend of 4.5 sen announced, in line with our FY17E 9.4 sen forecast. Maintain FY17-18E CNP at RM1.05-1.34b. Reiterate OUTPERFORM with TP of RM5.15.

1H17 broadly within. 1H17 CNP at RM693m made up 61% of consensus? RM1.13b forecast and 63% of our RM1.10b estimate. We deem this broadly within expectations as historically 1H earnings made up 57% of full-year results on average. We also note that 2H earnings could be softer on a seasonal weaker 3Q production. FFB production at 3.36m MT was in line at 51% of our forecast. An interim dividend of 4.5 sen was declared, which is in line with our 9.4 sen full-year estimate. Note that our CNP excludes unrealised forex loss on borrowings (RM330m) and derivatives fair value loss (RM23m).

Bump up on prices. YoY, CNP improved 22% in tandem with a 22% CPO price increase which offset 11% lower production, leading to 21% higher upstream EBIT. However, downstream EBIT declined 30% on lower volume and thinner margins (3.1% from 5.1%) as higher PK prices damped oleo-chemicals earnings. QoQ, CNP rose 12% as Plantation EBIT improved 3% on higher CPO prices (+12%) despite softer FFB production (-5%). Meanwhile, Downstream EBIT weakened 12% as derivatives losses (RM23m) offset better refining margins and oleo-chemical volume improvement post-lifting of RSPO suspension.

Still near-term supportive. Management expects CPO and PK prices to remain firm in 3Q17 due to low stocks, which benefits the upstream business, though they expect downstream margin to remain affected by higher prices. With management actively engaging stakeholders to improve on sustainability credentials, we expect to see further downstream volume recovery in the near- term. However, price benefits in 3Q17 could be partly offset by seasonally weaker production.

Maintain FY17-18E CNP at RM1.10-1.34b as we deem the results broadly in line with expectations.

Reiterate OUTPERFORM with unchanged TP of RM5.15 based on unchanged Fwd. PER of 27.0x applied to CY17E EPS of 19.1 sen. Our Fwd. PER of 27.0x implies mean valuation basis, which is in line with IOICORP?s average FY17E FFB growth prospect (7%) against the sector (7%). We like IOICORP as a laggard play among big cap planters, while the friendly resolution of its RSPO complaints should ease concerns on international demand for its downstream products. Hence we reiterate our OUTPERFORM call on IOICORP.

Source: Kenanga Research - 21 Feb 2017