IOI Corporation Berhad (IOICORP)’s 1Q19 CNP* of RM209m is broadly within expectations at 19% of consensus and 20% of our forecast. YoY, CNP softened 25% on lower CPO price (-15%) and FFB output (18%). QoQ, CNP improved 21% due to a fair value gain on biological assets, likely due to strong FFB production expected in future months. No dividend was declared, as expected. No changes to IOICORP’s FY19-20E CNPs of RM1.07-1.17b. Maintain MARKET PERFORM with an unchanged TP of RM4.50.

1Q19 CNP broadly within expectations. IOICORP’s 1Q19 core net profit (CNP*) came in broadly within expectations at RM209m, accounting for 19% of consensus’ RM1.08b forecast and 20% of our RM1.07b estimate. Note that our CNP calculation excludes a net FX loss of RM65.4m. 1Q19 FFB production of 713k MT is within expectation at 19% of our 3.71m forecast. No dividend was declared during the quarter, as expected.

Double whammy of price and output fall. YoY, CNP softened 25% as the average CPO price declined 15% to RM2,255/MT (from RM2,645/MT), exacerbated by an 18% drop in FFB production to 713k MT (from 870k MT). As a result, IOICORP’s upstream profit halved to RM150m. Nevertheless, the company’s downstream profit improved 21% due to higher oleochemical sales. QoQ, CNP was up 21% despite both CPO price and FFB output declining 6%, mainly due to a fair value gain on biological assets of RM8.9m (vs. a loss of RM22.3m in 4Q18) in the plantation segment. The fair value gain was likely a result of strong FFB production expected in future months. Consequently, upstream profit surged 32% during the quarter, albeit partially offset by an 8% dip in downstream profit owing to lower refining margin.

Looking ahead to 2H19. Going into 2Q19, we expect softer upstream earnings as higher FFB output is unlikely to supersede CPO price weakness of late. However, cheaper feedstock should bode well for downstream earnings and oleochemical performance. 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. Overall, we still expect a soft patch in 2Q19, while believing improvements would set in post-December as seasonal production slowdown sparks a recovery in CPO price.

No changes in IOICORP’s FY19-20E CNPs of RM1.07-1.17b as earnings were broadly in line with our forecasts.

Maintain MARKET PERFORM with an unchanged TP of RM4.50 pegged to unchanged Fwd. PER of 25.2x applied to CY19E EPS of 17.8 sen. Our Fwd. PER of 25.2x is based on its CY19E growth prospects of 4% and its large-cap and FBMKLCI component status. While IOICORP’s FFB growth prospect of 4% in CY19E trails the sector average of 5%, they benefit from the cushioning effect of its oleochemical segment. 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 - 13 Nov 2018