We recently met with IOI Corporation Berhad (IOICORP)?s Investor Relations team and came away maintaining our positive outlook on the back of better production and recovering downstream performance. No change to our FY17-18E CNP estimates of RM1.09-1.34b. Maintain OUTPERFORM with unchanged TP of RM5.15.

Production recovery on track. Management mentioned that the company could see flattish production growth for FY17, and a better recovery outlook in FY18-19E. Our estimates are more optimistic in the near term at 7% for FY17. Based on 9M17 production growth of 9% YoY we think this is achievable. We think the company's monthly production patterns, coming in at >20% YoY growth, indicate that production is well on track to normalize by FY18 or earlier.

Cost efficiency improving. As production recovers we expect better economies of scale leading to lower production cost per ton. We estimate that all-in production cost, including depreciation, came in at c.RM1,700/MT in FY16, compressing upstream margins. With a better production outlook, we estimate cost per ton to decline by c.15-5% in FY17-18, for better upstream margins.

Downstream to strengthen in mid-term. We gather that the CPO price rally in 2Q-3Q17 has led to higher input cost for the downstream segment, which dampens the outlook for the segment in the coming quarter. However, with the uplifting of its RSPO suspension, we observe some buyers gradually resuming contact with the company, including traders such as Bunge Limited, which noted that IOICORP is again an eligible supplier to the group since end-Feb 2017. IOICORP?s increased commitments to sustainability, including targeting the new RSPO Next certification, should soothe investor sentiment and gradually see some recovery from the reputational damage from its previous suspension. Meanwhile, the recent pull-back in CPO prices, while limiting upstream segment margins, should benefit the downstream in terms of lower costs, which bodes well for the segment in 4Q17.

M&A on the cards? We note that IOICORP has c.20-30k hectares (ha.) unplanted area remaining in Indonesia, making up c.10-15% of its gross plantation land bank. This is generally in line with other big cap planters, but well below the sector average of c.25% unplanted land bank against the total area. With rival planters such as KLK, making moves to acquire land banks, we believe IOICORP should be actively doing the same, though we understand that management remains focused on regional area (Malaysia and Indonesia) as these areas are closer to their existing production zones.

Maintain FY17-18E CNP estimates at RM1.09-1.34b as production outlook remains in line with our expectations.

Reiterate OUTPERFORM on IOICORP with unchanged TP of RM5.15 as we maintain our 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. We think IOICORP remains a laggard amongst other big caps, despite the resolution of its sustainability issues and improving production and cost outlook. Hence, we reiterate our OUTPERFORM call.

Source: Kenanga Research - 25 Apr 2017