IOI Corporation Berhad (IOICORP) recorded 1H18 Core Net Profit (CNP*) at RM607m, within consensus and our forecast at 52%. An interim dividend of 4.5 sen was announced, in line with historical patterns. No change to our FY18-19E CNP. Despite rolling forward our TP to RM5.15 (from RM5.00), we downgrade our call to MARKET PERFORM (from OUTPERFORM) as we believe the stock is fully valued in view of the strong price rally.

1H18 CNP in line. 1H18 CNP at RM607m came within consensus and our RM1.17b forecast at 52%. Note that our 1H18 CNP calculations exclude forex translation gains of RM265m resulting from the positive effect of MYR appreciation on IOICORP’s USD-denominated borrowings. FFB production at 1.89m metric tons (MT) makes up 58% of our full-year estimate, but we consider this in line as 1H production on average makes up 57% of full-year production. An interim dividend of 4.5 sen was announced, matching previous years’ trends. We expect the remainder of c.5.8 sen to be declared in 4Q18.

Production rebound. YoY, CNP softened 15% largely on higher tax charges (+23%) as core operating profit was flat at RM940m. This came as better upstream performance (+2%) from higher FFB production (+11%) was offset by softer downstream contribution (-3%) likely on a CPO price trend reversal. QoQ, CNP improved 27% on better performance across the board. Upstream earnings rose 12% on higher FFB volume (+17%) while Downstream core operating profit rose 10% as processing volume improved, leading to better economies of scale.

Shifting into higher margins. Management noted that the upstream business should continue to perform well on stable CPO prices and continued recovery of FFB production, while downstream should see decent performance in the oleochemical and specialty fats businesses which should “perform well” based on global economic growth. The divestment of their 70% stake in Loders Croklaan Group B.V. (Loders) is on track for completion in 3Q18. While we expect this to reduce revenue base by 26%, CNP should remain fairly stable with 7% YoY growth as lower earnings from Loders is offset by lower net gearing. We also observe, based on disclosures on discontinued operations, that the remainder downstream oleochemicals margins have strengthened YoY from 1.8% to 6.3% in 1H18, compared to Loders’ 3.2% to 4.9%, which bodes well for IOICORP’s downstream business prospects post-disposal.

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

Downgrade to MARKET PERFORM with higher TP of RM5.15 (from RM5.00) as we roll forward our valuation base year to FY19E (from CY19E) for higher EPS of 20.0 sen (from 19.3 sen). Our applied Fwd. PER is unchanged at 25.9x, implying mean valuation, which is in line with IOICORP’s average FFB growth prospect of 3-7%. While we continue to expect consistent earnings growth for IOICORP, we are downgrading our call to MARKET PERFORM (from OUTPERFORM) as we believe the stock is now fairly valued after the strong share price rally seen since Dec 2018.

Source: Kenanga Research - 26 Feb 2018