IOI Corporation Berhad (IOICORP) FY17 Core Net Profit (CNP*) at RM1.10b is within consensus at 97% but just below our forecast at 94% owing to lower-than-expected production at 94% of our forecast. A second interim dividend of 5.0 sen was announced for full-year DPS of 9.5 sen, which we deem within our 10.0 sen estimate. Lower FY18E CNP by 8%, accounting for softer yields. Maintain OUTPERFORM with lower TP of RM5.25.

FY17 meets consensus estimate, below ours. FY17 CNP at RM1.10b came in within consensus RM1.13b forecast at 97% but fell slightly short of our RM1.17b forecast at 94% owing to lower-than expected FFB production recovery to 3.16m metric tons (MT) (flat YoY), which made up 94% of our full-year estimate. A second interim dividend of 5.0 sen was announced, for total DPS of 9.5 sen, which we deem as within our 10.0 sen forecast.

Upstream jumps. YoY, FY17 CNP rose 25% as upstream operating profit contribution jumped 46% on higher CPO selling prices (+23%) while FFB production was flat at 3.16m MT. This was offset by weaker downstream contribution excluding derivative FV loss of 20% due to softer refining margins. QoQ, 4Q17 CNP improved 13% thanks to strong downstream (ex-derivatives FV loss) operating profit performance (+3.0x) on better sales volumes and oleo-chemical margin recovery. Upstream profit slightly improved (+3%) as stronger production volume (+22%) offset softer CPO prices (-10%).

Better downstream outlook. Management struck a more optimistic tone in its downstream business outlook with improving oleo-chemical performance seen on “lower and more stable feedstock prices” while specialty oils and fats businesses should see higher volume from multinational customers who have moved on past its previous RSPO suspension. On the upstream side, we note that FY17 saw depressed FFB yields of 21.7MT/ha, well below the pre-2016 average of 23.9x leading to FY17 production and missing our targeted +7%. While the conducive weather seen in all key producing regions is indicative of continued production recovery, we adjust our yield expectations lower to reflect slower improvement. As such, we expect FY18-19E FFB growth of 3-7%, generally in line with the sector average of +8%.

Reduce FY18E CNP by 8% to RM1.23b while introducing FY19E CNP of RM1.32b as we reflect slower yield recovery. We also introduce our FY19E CNP expectation of RM1.32b, implying EPS growth of 7%.

Maintain OUTPERFORM with lower TP of RM5.25 (from RM5.50) post earnings adjustment, as we roll forward our valuation base year to CY18E (from FY18E) for net lower applied EPS of 20.3 sen (from 21.0 sen). We also update our Fwd. PER to 25.9x (from 26.2x) with our mean valuation basis unchanged. This is in line with IOICORP’s average FY18-19E FFB growth prospect. With declining CPO and PK prices ahead, we expect the downstream segment to show performance improvement, in view of lower feed stocks. In spite of our adjusted earnings, we continue to like IOICORP as a laggard among big caps. Coupled with decent production and declining cost outlook, these considerations also support our OUTPERFORM call.

Source: Kenanga Research - 29 Aug 2017