IOI Corporation Berhad (IOICORP)’s 9M18 Core Net Profit (CNP*) at RM818m is within expectations at 72% of consensus and 70% of our forecast. No dividend was announced, as expected. No change to FY18-19E CNP. Upgrade to OUTPERFORM with unchanged TP of RM5.15 based on 25.9x Fwd. PER in view of improving fundamentals and potential M&A catalyst.

9M18 CNP within expectations. 9M18 CNP at RM818m came in within expectations, making up 72% of consensus’ RM1.14b forecast and 72% of our RM1.17b estimate. No dividend was announced, as expected. Note that our CNP calculation excludes gains and revaluations from discontinued operations at RM1.72b, as well as forex translation gains of RM170m.

Solid production growth. YoY, CNP softened 10% as CPO prices declined 6%, failing to offset a solid production rebound of 17% to 2.75m metric tons (MT). However, with lower input cost, core downstream profit (inclusive of discontinued operations) improved by 6% to RM368.1m. QoQ, CNP declined by 36% on lower volumes. Upstream contribution declined by 26% as CPO prices declined 7% and FFB volume weakened 15% in line with the seasonal low production season. Downstream core profit also weakened 50% to RM76.3m on lower volumes processed as noted.

Improving margins amid challenging operating environment. For its upstream business, management expects a mixed outlook as production increase (negative to prices) could be offset by China imposing tariffs on US soybeans, and a stronger USD. Above-average current year production prospects (our estimate at +11%), however, should ensure “satisfactory” contribution in the upstream segment. For the downstream business, management outlined “low to negative refining margins” but good prospects in the oleochemicals business in view of lower input cost. Furthermore, the sale of its Loders Croklaan stake to Bunge should substantially improve the balance sheet position from 0.8x net gearing in FY17A to 0.1x net gearing in FY18, allowing greater flexibility for future expansions.

Maintain FY18-19E CNP at RM1.18-1.26b as results came in line with our expectations. We update our FY18E NDPS estimate to 22.0 sen (from 10.4 sen) to reflect the 11.5 sen special dividend payout from the disposal of its Loders Croklaan stake.

Upgrade to OUTPERFORM with unchanged TP of RM5.15 based on unchanged Fwd. PER of 25.9x applied to FY19E EPS of 20.0 sen. Our Fwd. PER of 25.9x is based on mean valuation, which is in line with IOICORP’s FY18-19E FFB growth prospect of 10-2%, relatively close to the sector average of 8%. In spite of the Loders Croklaan stake sale, which we estimate will reduce revenue by 26%, we continue to expect earnings growth in FY18, indicating solid profit margin improvement post-disposal to 11% (from 8%). Combined with the substantial gearing reduction and positive FFB growth prospects for the year, we turn more positive on IOICORP and upgrade our call to OUTPERFORM. Further catalyst could be seen should IOICORP, with its lighter balance sheet, seek to expand its core businesses through earnings-accretive M&A.

Source: Kenanga Research - 17 May 2018