We came away from a management meeting remaining sanguine about IOICORP’s prospects. 4Q19 earnings are expected to remain stable, supported by stronger Oleochemical margins. Management guided a low single digit FFB production decline in FY20, but earnings are expected to improve, nonetheless, due to potential CPO price recovery. No changes in FY19-20E CNPs of RM876m- 1.01b. Maintain MP with a higher TP of RM4.35.

Expecting stable earnings performance in 4Q19. Despite potentially softer upstream plantation performance due to lackluster CPO prices and lower harvesting activities during Ramadan, IOICORP’s 4Q19 earnings are expected to remain stable from the previous quarter. This is largely underpinned by an expected improvement in Oleochemical margins, thanks to cheaper feedstock and stable demand for specialty products (especially those used in the pharmaceutical industry). Note that the downstream segment’s profit has already exceeded that of upstream segment’s in 3Q19. Furthermore, management expects improvement in the financial performance of its 30%-owned specialty fats associate Bunge Loders Croklaan, fueled by higher volume in the confectionary and human nutrition categories as well as the synergies arising from the integration with the larger Bunge set-up.

CPO price recovery to lift earnings in FY20. Management has embarked on an aggressive replanting exercise (6-7% of matured areas vs. 3-4% usually), mostly for Sabah estates as most palms in the region has past prime age. As a result, the group’s matured hectarage is expected to shrink by 2-3k Ha in FY20 (net of new Kalimantan areas coming into maturity). There should also be minimal new plantings in FY20 as c.80% of IOICORP’s remaining unplanted reserves (7.2k Ha) has already been planted in FY19 due to favourable weather conditions. Overall, management has guided a low single-digit decline in FFB production (vs. -2% expected for FY19) due to the replanting efforts, which should consequently lead to a 4-5% increase in CPO’s cost of production (consistent with our assumption). Nevertheless, we still expect earnings to improve in FY20 as higher CPO price (RM2,100/MT vs. RM2,047 projected for FY19) masks lower production and heightened cost of production, while Oleochemicals continue to perform well due to stable demand.

Leveraging downstream success. In view of the remarkable the Oleochemical performance, the group continues to plan for further capacity expansion in Prai, Penang. The new facility, which is slated to commence construction in December 2019, is expected to increase the group’s existing Oleochemical capacity by 110k MT/year (14% of 780k MT currently). However, we have not factored in any earnings contribution from this as construction of the facility is estimated to take 2 years, and operations are likely starting only in FY22. Meanwhile, the group remains on the lookout for brownfield plantation estates, but management notes that attractive deals are difficult to come by as most estate owners are demanding lofty valuations despite low CPO prices.

No changes in FY19-20E CNP of RM876m-1.01b as updates were consistent with expectations.

Maintain MARKET PERFORM with a higher Target Price of RM4.35 (from RM4.05) based on a higher CY20E PER of 27.2x (from 25.2x previously), implying -1.0SD (from -2.0SD previously). Valuations for other planters under our coverage are generally pegged at -1.0 to - 2.0SD. We think IOICORP deserves to trade at the higher end of the spectrum as it is one of the more profitable ones thanks to its sturdy downstream performance.

Source: Kenanga Research - 25 Jun 2019