IOICORP’s FY20 CNP of RM842.7m (+11% YoY) came in within our (100%), but above consensus (115%), estimate. FY20 FFB output of 3.10m MT (-9% YoY) and FY20 DPS of 8.0 sen are also within expectations. We expect 1QFY21 upstream earnings to improve sequentially premised on higher CPO price (QTD 1QFY21: +18% QoQ) and higher FFB output (peak production). Fine tune FY21E CNP by - 0.4% on housekeeping and introduce FY22E CNP of RM1.03b with 4.7% FFB growth. Still a MARKET PERFORM with unchanged TP of RM4.40 based on FY21E PER of 29x (-0.5SD).

Within our, but above consensus’, estimate. IOI Corporation (IOICORP) registered 4QFY20 core net profit (CNP) of RM235.5m, bringing FY20 CNP to RM842.7m (+11% YoY) which is within our expectation at 100%, but above consensus’ estimate at 115%. FY20 FFB output of 3.10m MT (-9% YoY) is also in-line with our expectation at 100%. 4QFY20 DPS of 4.0 sen brought FY20 DPS to 8.0 sen, spot on with our estimate.

Results’ highlight. YoY, FY20 CNP rose (+11%) as higher CPO price (+14%) outstripped lower FFB output (-9%). As a result, plantation segmental profit leapt (+51%). However, higher CPO price also led to higher feedstock price which caused downstream profits to contract (-28%). QoQ, 4QFY20 CNP was boosted by both: (i) upstream division improvement (+52%) as higher FFB output (+37%) outweighed lower CPO price (-12%), and (ii) downstream division improvement (+53%) on lower feedstock prices.

Expecting a sequential improvement in 1QFY21. We expect improvement in 1QFY21 upstream earnings on the back of higher CPO prices (QTD 1QFY21: +18% QoQ), alongside higher FFB output, entering into peak production period. Having said that, we caution that CPO price is still expected to come under pressure in the near-term as we enter peak production season.

Fine-tune FY21E CNP by -0.4% on housekeeping and introduce FY22E CNP of RM1.03b on FY22E FFB output growth of 4.7%.

Maintain MARKET PERFORM with an unchanged TP of RM4.40 based on an unchanged FY21E PER of 29x (in-line with large cap peers’ average), reflecting -0.5SD from mean. In our view, the sector faces headwinds ahead as CPO prices should trend lower premised on our anticipation of rising inventory. Furthermore, the large exports (inventory replenishment efforts) during June July are not sustainable. At this juncture, reward-to-risk favors the latter. Based on the reasons above, we believe our ascribed PER of 29x and MP call are 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 - 26 Aug 2020