IOICORP’s 9MFY20 CNP of RM656.7m (+3% YoY) came in below our (69%), but within consensus (79%), estimate. The negative deviation stemmed from lower-than-expected FFB output (-14% YoY) and CPO price realized. We expect weakness in 4QFY20 on lower CPO price (QTD 4QFY20:-18% QoQ) and downstream margins pressure. Reduce FY20-21E earnings by 11-10% on lower revised FFB output, implying FY20E/FY21E growth of -9%/+5% and lower CY20-21 CPO price forecast of RM2,300-2,400/MT. Downgrade to MARKET PERFORM, but with a higher TP of RM4.25 based on rolled over FY21E PER of 28x, reflecting slightly above -1.0SD from mean.

Below our, but within consensus’, estimate. IOI Corporation (IOICORP) registered 3QFY20 core net profit (CNP) of RM220.5m (+8% YoY; -4% QoQ), bringing 9MFY20 CNP to RM656.7m (+3% YoY) which is below our expectation at 69% but within consensus at 79%. The deviation from our estimate stemmed from: (i) lower-than-expected 9MFY20 FFB output of 2.23m MT (- 14% YoY) accounting for 69% of our full-year estimate, and (ii) lower-than expected CPO price realized. The absence of dividend was as expected.

Results’ highlight. YoY, 9MFY20 CNP climbed (+3%) on higher CPO prices (+13%). The impact of higher CPO prices was muted by lower FFB output (- 14%). QoQ, despite higher CPO price (+20%), 3QFY20 CNP slipped (-4%) due to lower FFB output (-21%) from the lagged dry weather impact in 2019. Note that we have excluded a series of non-core items, which includes forex losses of c.RM258m.

Expecting a slightly weaker 4QFY20. We expect slight weakness in 4QFY20 upstream earnings on the back of lower CPO prices (QTD 4QFY20: -18% QoQ), which should be partially offset by higher FFB output for the quarter. Apr 2020 FFB output of 271k MT is still lower (-2% YoY) than Apr 2019 but has shown significant improvement (+30% MoM) compared to Mar 2020. We also expect downstream margins to come under pressure on lower ASP from the recent decline in CPO prices. Meanwhile, the sector’s outlook has improved after risks associated with demand from failure to implement biodiesel mandates (B30 Indonesia, B20 Malaysia) have been addressed. That said, risk of CPO price pressure entering into peak production season remains.

Reduce FY20-21E CNP by 11-10% on lower FY20-21E FFB output by 4-2%, implying post revision FY20E/21E FFB growth of -9%/+5% (vs. -5%/+3% previously) with lower CY20-21 CPO price forecast of RM2,300-2,400/MT (vs. RM2,550/MT previously).

Downgrade to MARKET PERFORM but with a higher TP of RM4.25 (from RM4.10) based on rolled over FY21E PER of 28x (in-line with large cap peers’ average), reflecting slightly above -1.0SD from mean. In our view, the sector lacks further catalysts to propel CPO prices higher. Demand resumption from India is unlikely to outstrip rising production, which should be reflected in MPOB data in the coming months, capping CPO price upside. At this juncture, reward-risk favors the latter. Based on reasons above, we believe our ascribed PER of 28x and downgrade is fair.

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

Source: Kenanga Research - 28 May 2020