IOICORP’s 1QFY20 CNP of RM205m (-2% YoY; 65% QoQ) came in below our expectations at 20% but within consensus at 24%, stemming from lower-than-expected FFB output and lower-than-expected upstream margin. No dividend was declared, as expected. Trim FY20-21E CNP by 9-8% on lower FFB output and higher CPO production cost (+3%). Maintain MARKET PERFORM with a lower TP of RM4.45 based on rollover CY20E PER of 27.7x.

Below our but within consensus forecasts. IOI Corporation (IOICORP)’s 1QFY20 core net profit (CNP) of RM205m (-2% YoY; 65% QoQ) came in below our expectation at 20% but within consensus at 24%. Historically, 1QFY accounted on average 28% of full-year CNP. The deviation from our estimate stemmed from: (i) slightly lower-than- expected FFB output of 802k MT, accounting for 23% of our 3.43m MT (historically, 1QFY FFB accounted on average 28% of annual output), and (ii) lower-than-expected plantation margin of 23% (vs. expected 27%) likely due to lower yields from aggressive replanting efforts. No dividend was declared, as expected.

Results’ highlight. YoY, 1QFY20 CNP slipped (-2%) as Plantation profit fell (-15%) on the back of a 10% decline in average CPO price, despite a 12% increase in FFB output. This was partially cushioned by 6% improvement in Downstream profit, thanks to cheaper feedstock, higher sales volume and higher share of associate results from Bunge Loders Croklaan Group B.V. (Loders). QoQ, 1QFY20 CNP surged 65%, boosted by: (i) a 50% increase in plantation profit on higher OER (+1ppt) and higher CPO prices (+1%), and (ii) 55% increase in Downstream profit as refining margins normalized to 8% (+3ppt).

Expecting a stronger 2QFY20. Looking into 2QFY20, we expect stronger upstream earnings on higher CPO prices on the back of higher CPO prices (QTD 4QCY19: +12%), while FFB output remains flattish. For the rest of FY20, the group’s upstream division should continue to benefit from strong CPO prices (we believe CPO price should remain within the range of RM2,300-RM2,500/MT). Meanwhile, the group intends to replant c.6.2% (c.11k ha) of its total oil palm planted area in FY20, which should result in a slight dip in FFB output.

Trim FY20-21E CNP by 9-8% to RM944-RM1071m after lowering FY20-21E FFB output by 3-2% and increase CPO production cost by 3% to RM1,750/MT reflecting the group’s aggressive replanting efforts.

Maintain MARKET PERFORM with a lower Target Price of RM4.45 (from RM4.60), based on a rollover CY20E PER of 27.7x (previously FY20E PER of 27.7x), implying mean valuation. We believe FY20 should spell out a better year for IOICORP from both stronger Upstream (higher CPO prices) and solid Downstream. However, at the current price level, IOICORP appears fully valued at CY20E PER of 27.7x (mean).

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 - 27 Nov 2019