IOICORP’s 1H19 CNP* dropped 29% YoY to RM432m, falling broadly within consensus estimate at 45%, but missed ours at 40% due to FFB shortfall. YoY, 2Q19 CNP softened 32% on lower average CPO price (-27%) and FFB output (-3%). QoQ, CNP improved 6% on 38% FFB growth and better downstream performances. Dividend of 3.5 sen also missed expectation. Trim FY19E CNP by 3% to RM1.03b and DPS to 7.0 sen, while maintaining FY20E numbers. Maintain MARKET PERFORM with lower TP of RM4.45.

Broadly within consensus estimate but missed ours. IOICORP’s 1H19 core net profit (CNP*) dropped 29% YoY to RM432m, falling broadly within consensus estimate at 45%, but missed ours at 40% as FFB output came in short at 1.70m MT – accounting for only 46% of our 3.71m forecast. A 3.5 sen dividend was declared, below our 4.5 sen expectation. As such, we have lowered our FY19E dividend forecast to 7.0 sen from 9.0 sen.

Downstream saved the day. YoY, CNP softened 32% as the average CPO price declined 27% to RM1,932/MT (from RM2,644/MT), exacerbated by an 3% dip in FFB production to 983k MT (from 1.02m MT). As a result, Plantation profit plummeted 66% to RM117m. Nevertheless, this was cushioned by a 9% improvement in Manufacturing profit to RM139m, thanks to cheaper feedstock and higher sales volume. QoQ, despite a 14% drop in the average CPO price, CNP inched up 6% on the back of 38% FFB growth and an 8% increase in Manufacturing profit, due to same reasons noted above.

Expect further sequential improvement. In spite of a potential seasonal dip in FFB output, we expect further improvement in 3Q19 earnings, underpinned by a recovery in average CPO price in 3Q19. This is likely to be enhanced by stronger downstream performances as prices of PK – a key raw material for the group’s oleochemical business – have not tracked CPO’s recovery. In addition, we understand that demand for the group’s fatty acids and fatty esters has remained stable. 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.

Trim FY19E CNP by 3% to RM1.03b as we lower FY19E FFB production forecast to 3.59m MT (+2%) from 3.71m (+6%), while maintaining FY20E FFB and CNP forecasts.

Maintain MARKET PERFORM with a slightly lower TP of RM4.45 (from RM4.50) pegged to an unchanged Fwd. PER of 25.2x (-1.5SD) applied to reduced CY19E EPS of 17.6 sen (from 17.8 sen). Our Fwd. PER of 25.2x reflects its CY19E growth prospects of 4% and its large- cap and FBMKLCI component statuses. In spite of brighter earnings outlook in the near-term, IOICORP’s FFB growth prospect of 4% in CY19E trails the sector average of 5%. At the current price level, we believe IOICORP is already fully valued.

Risks to our call are sharp rises and falls in CPO prices and a precipitous rise/fall in fertiliser/labour/transportation costs.

Source: Kenanga Research - 21 Feb 2019