IOICORP’s 3Q19 CNP* came within expectations at RM205m (-3% YoY; -8% QoQ), bringing 9M19 CNP to RM636m (-22% YoY). The cumulative CNP accounted for 70% of consensus full-year estimate and 73% of ours. 9M19 FFB output of 2.59m MT also aligned with our 3.59m MT full-year forecast at 72%. No dividend was declared, as expected. No changes in FY19-20E CNPs of RM876m-1.01b. Maintain MP with unchanged TP of RM4.05.

Within expectations. 3Q19 core net profit (CNP*) came within expectations at RM205m (-3% YoY; -8% QoQ), bringing 9M19 CNP to RM636m (-22% YoY). The cumulative CNP accounted for 70% of consensus full-year estimate and 73% of ours. 9M19 FFB output of 2.59m MT also aligned with our 3.59m MT full-year forecast at 72%. No dividend was declared, as expected.

Cushioned by Downstream. YoY, 3Q19 Plantation profit plummeted 61% on the back of a 20% decline in the average CPO price to RM1,971/MT, masking the effect of a 4% FFB output increase. However, this was largely offset by a 53% surge in Downstream profit, thanks to cheaper feedstock and higher sales volume. Overall, 3Q19 group CNP was down by a manageable 3%. QoQ, Plantation profit improved 11% owing to a 2% increase in the average CPO price and fair value changes on investments and biological assets. Excluding the fair value changes, Plantation profit, in fact, showed a 12% drop as the FFB output dipped 9%. Meanwhile, Downstream recorded a 41% jump in profit as PK prices traded 9% lower. Overall, the Downstream improvement was insufficient to offset the slump in Plantation profit, resulting in an 8% reduction in 3Q19 CNP.

4Q19 earnings to remain stable. Going into 4Q19, we expect the Plantation segment to register another earnings dip due to lackluster CPO prices and lower harvesting activities during Ramadan. However, very much like this quarter, the Plantation earnings’ shortfall should be largely offset by Downstream’s performance with cheap feedstock and stable demand. Furthermore, management expects improvement in the financial performance of its 30%-owned specialty fats associate Bunge Loders Croklaan, underpinned by higher volume in the confectionary and human nutrition categories and the synergies arising from the integration with the larger Bunge set-up. Overall, we expect 4Q19 earnings to remain stable or post a slight improvement given that Downstream profit has already exceeded that of Plantation’s this quarter.

No changes in FY19-20E CNPs of RM876m-1.01b as earnings came within expectations.

Maintain MARKET PERFORM with unchanged Target Price of RM4.05 based on a Fwd. PER of 25.2x (-1.5SD) and a CY20E EPS of 16.1 sen. Our Fwd. PER of 25.2x reflects its CY20E growth prospects of 5% and its large-cap and FBMKLCI component statuses. In spite of the depressed CPO price environment, IOICORP’s earnings remain relatively stable thanks to its solid Downstream performances. At the current level, IOICORP’s share price appears fully valued at CY20E PER of 26.3x (-0.5SD).

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 - 23 May 2019