IOI Corporation Berhad (IOICORP)’s FY18 CNP* at RM934m was markedly below expectations at 78% of consensus and 79% of our forecast due to lower-than-expected profit margins. An interim dividend of 4.5 sen was announced, bringing total FY18 dividend to 20.5 sen, slightly below our forecast of 22.0 sen. Trim FY19E CNP by 12% and introduce FY20E. Downgrade to MARKET PERFORM with lower TP of RM4.40 (from RM5.00) based on unchanged 25.1x Fwd. PER.

FY18 CNP markedly below expectations. IOICORP FY18 core net profit (CNP*) at RM934m came in markedly below expectations, making up only 78% of consensus’ RM1.20b forecast and 79% of our RM1.18b estimate. This was attributable to lower-than-expected profit margins. Note that our CNP calculation excludes profit from discontinued operations at RM1.83b, as well as forex gains of RM318m. An interim dividend of 4.5 sen was announced, bringing total FY18 dividend to 20.5 sen, slightly below our forecast of 22.0 sen.

Hurt by lower CPO price. YoY, CNP softened 5% as the average CPO price declined 8% to RM2,549/MT, failing to offset solid production growth of 11% to 3.51m MT. However, with lower input cost, IOICORP’s core downstream profit doubled to RM384m. QoQ, CNP declined by 18% on a 12% seasonal decline in FFB production (762k MT) and a lower average CPO price of RM2,409/MT (-3%). As a result, upstream earnings declined by 46%, partially cushioned by a 4.6x increase in downstream profit.

Better year ahead. Going into FY19, we believe earnings would pick up on higher FFB output (our estimate at +6%) and better oleochemical performance due to cheaper feedstock. Furthermore, management expects improvement in the financial performance of its 30%-owned specialty fats associate Bunge Loders Croklaan, underpinned by higher product margins in Europe and the synergies arising from the integration with the larger Bunge set up. Notwithstanding, we reckon that this is insufficient to catch up with our CNP estimate of RM1.26b.

Trim FY19E CNP by 12% to RM1.10b as we moderate our previously optimistic FY19E downstream margin expectations and tweak our fertiliser cost assumptions on higher crude oil prices. We also introduce FY20E net profit of RM1.17b, which represents estimated growth of 6% from FY19E.

Downgrade to MARKET PERFORM with lower TP of RM4.40 (from RM5.00) pegged to unchanged Fwd. PER of 25.1x applied to FY19E EPS of 17.6 sen. Our Fwd. PER of 25.1x is based on mean valuation. While IOICORP’s FFB growth prospects of 6% in FY19E trail the sector average of 9%, they benefit from the cushioning effect of its oleochemical segment. Nevertheless, we believe FY19E earnings growth of 18% is already priced in at the current valuation. Hence, we downgrade our call from OUTPERFORM to MARKET PERFORM. Further catalysts could be seen should IOICORP, with its lighter balance sheet, seek to expand its core businesses through earnings- accretive M&A.

Risks to our call are sharp rises and falls in CPO prices and a precipitous rise in minimum wage.

Source: Kenanga Research - 20 Aug 2018