IOICORP 9M17 CNP at RM883m came in within consensus at 74% and slightly above our forecast at 81% on betterthan-expected downstream performance and higher CPO prices. No dividend was declared, as expected. We revise up FY17-18E CNP by 7-0% to RM1.17-1.34b. Maintain OUTPERFORM with higher TP of RM5.50 (from RM5.15) as we roll forward our valuation base year to FY18.

9M17 within consensus; above our forecast. IOI Corporation Berhad (IOICORP) 9M17 Core Net Profit (CNP*) at RM883m came in within consensus expectations at 74% of RM1.19b, and slightly above our forecast at 81% of RM1.09b. This was due to better-thanexpected downstream segment performance, coupled with higher YoY CPO prices received (+27% to RM2,753/metric ton (MT) in 9M17). No dividend was declared, as expected.

Price boost amid production recovery. YoY, CNP improved 30% on the back of 35% higher upstream operating profit, as CPO prices rose 27% to RM2,753/MT while FFB production losses eased to - 3%, from -11% in 1H17. However, this was due to limited softer downstream core operating profit (excluding derivatives fair value movement) which declined 26% due to higher PK prices, limiting margins, and lower sales volume in view of last year’s suspension.

QoQ, CNP weakened 48% as upstream operating profit declined 28% due to seasonally lower FFB production (-21%), in spite of stronger CPO prices (+13% to RM3,118/MT). Meanwhile, downstream core operating profit weakened 89% on higher input cost and softer refining margins.

Normalising price and production. We remain optimistic on IOICORP’s prospects with production recovery on track to meet our 7% FFB growth estimate for FY17E. As production recovers, we expect cost per tonne to decline, for upstream margin improvement. Meanwhile, despite lower prices dampening sector sentiment, we expect the downstream segment to see lower input cost, particularly on lower PK prices, which should benefit sector margins going forward. As IOICORP increases its commitments to sustainability, we expect buyers to gradually resume purchases, benefiting downstream margins over the mid-term.

Increase FY17-18E CNP by 7-0% to RM1.17-1.34b as we tweak our downstream margins to reflect a more favorable cost structure.

Reiterate OUTPERFORM with higher TP of RM5.50 (from RM5.15) as we roll forward our valuation base year to FY18E (from average FY17-18E). As a result, our applied EPS is increased to 21.0 sen (from 19.0 sen). In view of our earnings upgrade, we also update our applied PER to 26.2x (from 27.0x) with our mean valuation basis unchanged. This is in line with IOICORP’s average FY17E FFB growth prospect at 7% against the sector’s 8%. Nevertheless, we continue to like IOICORP as a laggard among other big caps, with improving production and cost outlook which supports our OUTPERFORM call.

Source: Kenanga Research - 17 May 2017