IOICORP’s 1HFY20 CNP of RM424m (-2% YoY) came in below our (41%), but within consensus (48%), estimate. The negative deviation stemmed from lower-than-expected FFB output (-6% YoY) due to dry weather impact. DPS of 4.0 sen was as expected. Expecting 2HFY20 earnings to capture the bulk of higher CPO price (QTD 3QFY20: +16%). Trim FY20- 21E earnings by 5-4% on lower FFB output, implying FY20E/FY21E growth of -5%/+3%. Maintain OUTPERFORM with lower TP of RM5.15 (from 5.40) based on CY20E PER of 30x (+1SD). Currently, IOICORP is only trading at mean valuation (vs. +1SD during similar CPO price rally in 2017).

Below our, but within consensus’ estimate. IOI Corporation (IOICORP) registered 2QFY20 core net profit (CNP) of RM218.6m (- 2% YoY; +6% QoQ), bringing 1HFY20 CNP to RM424.0m (-2% YoY) which is below our expectation at 41% but within consensus at 48%. The deviation from our estimate stemmed from lower-than-expected 1HFY20 FFB output of 1.60m MT (-6% YoY) due to the dry weather impact, accounting for 48% of our full-year estimate. Historically, 1HFY FFB output accounted for c.53% of full-year FFB output. A 4.0 sen dividend was declared, as expected.

Results’ highlight. YoY, 1HFY20 CNP slipped (-2%) due to: (i) 6% decline in FFB output to 1.60m MT, and (ii) decline (-38%) in Downstream profit on higher CPO price (+2%). However, this was partially cushioned by an increase (+13%) in Plantation profit. Had it not been for the decline in FFB output (-6%), the increase in Plantation profit would have been more substantial. QoQ, 2QFY20 CNP increased (+6%) on the back of higher CPO price (+12%) as FFB output remained flat, resulting in a 38% increase in Plantation profit.

Expecting a stronger 3QFY20. We expect sequential improvement in IOICORP’s upstream earnings on the back of higher CPO prices (QTD 3QFY20: +16%), while FFB output remains flattish. For the rest of FY20, the group’s upstream division should continue to benefit from strong CPO prices on sustained favourable demand-supply equation of CPO. We expect to see a more pronounced impact of higher CPO price on earnings in 2HFY20. Our CY20 CPO price forecast of RM2,700/MT remains unchanged.

Trim FY20-21E CNP by 5-4% to RM996-RM1163m after lowering FY20-21E FFB output by 3-3%, implying post revision FY20E/21E FFB growth of -5%/+3% (vs. -2%/+3% previously).

Maintain OUTPERFORM with a lower Target Price of RM5.15 (from RM5.40) based on CY20E PER of 30x (+1 SD from mean). We believe FY20 should spell out a better year for IOICORP from both stronger Upstream (higher CPO prices) and solid Downstream performance. Despite the CPO price rally, at current price, IOICORP is trading at Fwd. PER (CY20) of 26x, implying mean valuation (vs. +1SD during a similar CPO price rally in 2017).

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

Source: Kenanga Research - 19 Feb 2020