IOI Corporation Berhad (IOICORP) 1Q18 Core Net Profit (CNP*) of RM278m came in within expectations at 23% of consensus and 24% of our forecast. No dividend was announced, as expected. No change to our FY18-19E forecast with OUTPERFORM call and TP of RM5.00 maintained.

1Q18 within expectations. 1Q18 CNP of RM278m is in line with expectations, at 23% of consensus’ RM1.18b and 24% of our RM1.17b forecast. Note that our CNP calculations exclude forex translation gains of RM69m resulting from the positive effect of MYR appreciation on IOICORP’s USD-denominated borrowings. FFB production at 870k metric tons (MT) is in line with our 3.25m MT estimate at 27%. No interim dividend was announced, as expected.

Price support offsets cost compression. YoY, CNP declined 21% largely on thinner margins in the resource-based Manufacturing (downstream) segment. On a core basis, we note that downstream operating profit weakened 12% representing a margin decline to 3.8% (from 4.9%). We gather that this is due to the weaker specialty fats sub-segment which reported RM10.9m profit (-87% from RM81.7m), which could signify a slow recovery from the RSPO suspension one year ago. The Plantation (upstream) segment saw flat core contribution (-2%) despite better CPO prices (+7%) and flat FFB growth, which we believe was due to higher operating costs (i.e. higher minimum wages). QoQ, CNP rose 20% on stronger upstream contribution (+16%) as higher FFB production (+9%) provided better economies of scale, offsetting softer CPO prices (-6%). Downstream performance also improved (+13%) on better refining volume and higher oleochemical margins.

Recovery track. Management observed that FFB production has “shown recovery” after weaker performance due to the El Nino impact. Combined with better prices, we believe that the segment should continue to show improvement for the full year, although 2Q18 may soften in view of seasonally lower production. Meanwhile, downstream performance, excluding the underperforming specialty fats assets for disposal, should start to see better contributions, especially as rising crude oil prices increases the attractiveness of alternative products.

Maintain FY18-19E CNP at RM1.17-1.26b as results came in line with our expectations.

Reiterate OUTPERFORM with unchanged TP of RM5.00 based on Fwd. PER of 25.9x applied to unchanged CY18E EPS of 19.3 sen. Our valuation basis is unchanged at mean valuation, in line with IOICORP’s average FFB growth prospect of 3-7%. With supportive CPO and crude oil prices, we expect to see good performance for both upstream and downstream segments in the quarters ahead. Thus, we maintain our OUTPERFORM call on IOICORP.

Source: Kenanga Research - 20 Nov 2017