IOICORP’s 1QFY21 CNP of RM251.5m (+7% QoQ; +22%YoY) came in within our estimate (25%), but is deemed above consensus’ (28%). 1QFY21 FFB output of 878.7k MT (+10%YoY) and absence of DPS are also within expectations. We expect 2QFY21 upstream earnings to improve sequentially premised on higher CPO prices (QTD 2QFY21: +13% QoQ) outstripping a dip in production and lower downstream (c.25% of profits). Maintain OUTPERFORM with a higher rolled-over TP of RM4.95 based on CY21E PER of 30x (-0.5SD).

Within our, but above consensus’, estimate. IOI Corporation (IOICORP) registered 1QFY21 core net profit (CNP) of RM251.5m (+7% QoQ; +22% YoY) which is within our expectation at 25%, but deemed above consensus’ estimate at 28%, in view of stronger earnings from 2QFY21. 1QFY21 FFB output of 878.7k MT (+10% YoY) is also in-line with our expectation at 27%. The absence of DPS was as expected.

Upstream shines. YoY, 1QFY21 CNP rose (+22%) lifted by a combination of higher average CPO price (+28%) and FFB output (+10%). As a result, plantation segmental profit leapt (+126%) which overshadowed the decline (- 34%) in downstream earnings from higher feedstock price. QoQ, 1QFY21 CNP improved (+7%), similarly as a result of both higher CPO price (+9%) and FFB output (+2%). Upstream division’s improvement (+14%) also masked lower downstream earnings (-10%).

2QFY21 to improve further. Despite expectations of a slight dip in production, we expect sequential improvement in 2QFY21 upstream earnings on the back of higher CPO prices (QTD 2QFY21: +13% QoQ). This should outstrip the dip in FFB output and declines in downstream earnings (higher feedstock price-led). Overall, FY21 FFB output is expected to grow 4% YoY. This is in spite of the group’s aggressive replanting plan (FY21: c.12k Ha). As the group is still hunting for potential M&As, there could be further upside to FFB growth. Recall that the group has a c.RM1b war chest earmarked for investments, with preference towards brownfield upstream plantation assets.

No changes to earnings estimate as the results were in line with expectations.

Maintain OUTPERFORM with a higher TP of RM4.95 (from RM4.80) based on a rolled-over CY21E PER of 30x, reflecting -0.5SD from mean. Currently, IOICORP is traded at CY21E PER of 27x, implying -1.0SD valuation. We believe the company should trade at a minimum of -0.5SD valuation given: (i) high CPO price environment, (ii) decent FFB growth of 4% potential (even after aggressive replanting efforts of c.12k Ha), and (iii) its integrated operation and FBM KLCI status. Risks to our call are: sharp rise/fall in CPO prices and a precipitous increase/decline in fertiliser/labour/transportation costs.

Source: Kenanga Research - 17 Nov 2020