INVESTMENT HIGHLIGHTS

• 4QFY19 normalised earnings of RM150.3m (+8.2%yoy) supported by lower effective tax rate

• Full year FY19 normalised earnings of RM717.7m (-26.1%yoy) came in within our expectations

• Impact of lower CPO and PK prices were further aggravated by softer FFB production

• Maintain SELL with a revised target price of RM3.48

Quarterly earnings supported by lower effective tax rate. IOI Corporation Bhd’s (IOICorp) 4QFY19 normalised earnings came in at RM150.3m, an increase of +8.2%yoy. Despite lower revenue of RM1,738.2m (-3.5%yoy), the group’s higher normalised earnings was mainly attributable to lower effective tax rate. Note that the average and CPO and PK prices realised for 4QFY19 were lower at RM1,988/mt (-17.5%yoy) and RM1,127 (-37.5%yoy).

In-line with our expectation. Cumulatively, full year FY19 normalised earnings amounted to RM717.7m (-26.1%yoy). 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 for FY19 were RM2,025/mt (-20.6%yoy) and RM1,390/mt (-38.3%yoy) respectively. Meanwhile, FFB production shrunk by -3.3%yoy to 3.4m mt. All in, IOICorp full year FY19 financial performance came in within ours but below consensus expectations, accounting for 98.9% and 88.8% of full year FY19 earnings estimates respectively.

Impact on earnings. No change to our earnings estimates at this juncture.

Dividend. The group announce 4Q19 dividend of 4.5sen per share. This led to full year FY19 dividend of 8.0sen per share. This is lower than our full year FY19 dividend estimates of 9.0sen per share. Note that in FY18 the dividend payout was much higher at 20.5sen per share due to the inclusion of 11.5sen special dividend subsequent to the disposal of its 70% stake in Loders Croklaan Group BV.

Target price. We are maintaining our target price of RM3.48. 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.

Maintain 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 help to partially cushioned the impact of lower palm oil prices. The higher effective tax rate also led to contraction in the group’s profit margin. Given the challenging business environment, the cash reserve has also reduced by -6.0%yoy. We expect this will keep the future dividend yield below three percent. In view of the subdued outlook in the immediate term, we are maintaining our SELL recommendation on the stock.

Source: MIDF Research - 16 Aug 2019