INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings of RM170.2m (-21.1%yoy) dragged by lower CPO and PK prices

• Cumulative 9MFY19 normalised earnings failed to kept pace with ours and consensus expectations

• Expecting lower dividend payout in view of weaker earnings performance

• Downgrade to SELL with a revised target price of RM3.48

Continuous contraction in quarterly earnings. IOI Corporation Bhd’s (IOICorp) 3QFY19 normalised earnings came in at RM170.8m, a decline of -21.1%yoy. This was mainly attributable to lower CPO and PK prices as well as higher effective tax rate. The average and CPO and PK prices realised for 3QFY19 were lower at RM1,971/mt (-20.2%yoy) and RM1,312 (-40.4%yoy).

Below expectations. Cumulatively, 9MFY19 normalised earnings amounted to RM540.2m. This was mainly due to lower contribution from the plantation segment which was partially mitigated by contribution from the resource-based manufacturing segment. Note that the average CPO and PK prices were RM2,039/mt (-21.4%yoy) and RM1,474/mt (-38.0%yoy) respectively. Meanwhile, FFB production shrunk by -5.8%yoy to 2.6m mt. All in, IOICorp 9MFY19 financial performance came in below ours and consensus expectations, accounting for 47.4% and 59.0% of full year FY19 earnings estimates.

Impact on earnings. We are adjusting downwards FY19 and FY20 earnings estimates to RM726.0m and RM872.9m, mainly premised on lower CPO and PK prices assumption.

Dividend. In-line with the expectancy of weaker future earnings performance, we are also reducing our FY19 and FY20 dividend assumptions to 9.0sen and 10.5sen respectively.

Target price. Post our earnings adjustments; we are deriving a revised target price of RM3.48 (previously RM4.16). This is achieved by pegging revised FY20 EPS of 13.9sen against target PER of 25x. Note that our target PER is in-line with the group’s two year historical average PER.

Downgrade to SELL. The weak palm oil prices continue to negatively impact the financial performance of the group. This is further exacerbated by the reduction in FFB production. In comparison, its peers recorded higher FFB production which partially mitigates the lower palm oil prices. Moving forward, the management guided that 4QFY19 FFB production remains weak in view of the change in seasonality of the Malaysian production pattern and lower harvesting productivity during Ramadhan. Coupled with the lower palm oil prices, the higher effective tax rate incurred has led to contraction in the group’s profit margin. Given the challenging business environment, the cash reserve has reduced by -16.3%yoy. We opine that this in-turn will affect the group’s capability to payout dividend. In view of the subdued outlook in the near term, we are downgrading our stock recommendation to SELL from neutral previously.

Source: MIDF Research - 23 May 2019