KEY INVESTMENT HIGHLIGHTS

• Higher contribution from the downstream segment led to +2.4%yoy expansion in 1QFY20 normalised earnings

• Nonetheless, earnings from the upstream segments contracted further

• Recovery in commodity prices to spur future contribution from the upstream segment

• Sizeable war chest to provide opportunity for acquisition of brownfield plantation asset

• Upgrade to Neutral with a revised TP of RM4.22

Improvement in quarterly earnings. IOI Corporation Bhd’s (IOI) 1QFY20 normalised earnings came in at RM184.5m (+2.4%yoy). The improvement in earnings was mainly due to higher contribution from the resource-based manufacturing segment. Note that the plantation segment reported lower profit. All in, IOI’s 1QFY20 financial performance came in within ours and consensus expectations, accounting for 21.1% and 21.6% of full year FY20 earnings estimates.

Plantation. The segment profit reduced by -15.3%yoy to RM126.6m. This was mainly attributable to lower share of associate results and lower CPO and PK prices realised. Note that the average CPO and PK prices realised were RM2,014/mt (1QFY19: RM2,236/mt) and RM1,126/mt (1QFY19: RM1,766/mt) respectively.

Resource-based Manufacturing. The segment profit came in +5.7%yoy higher at RM136.5m. This is in view of higher sales volume and margins from the refining sub-segment and higher share of associate results from Bunge Loders Croklaan Group B.V.

Target Price. We are rolling forward our valuation based year to FY21 and derived a new target price of RM4.22 (previously RM3.48). This premised on pegging FY21 EPS of 14.8sen against forward PER of 28.5x which represents one standard deviation above the two-year historical average. We view that the target PER reflects IOI position as a fullyintegrated plantation companies, with strong balance sheet, which has enable the group to weather the weak CPO and PK price while remain on the lookout for earnings accretive acquisition.

Upgrade to NEUTRAL. The notable recovery in commodity prices from October 2019 onwards is expected to have positive impact on the group’s plantation division. Nonetheless, the expectancy of flat FFB production in FY20 could limit the earnings upside. Coupled with steady contribution from the downstream segment, we expect the group’s overall earnings in the upcoming quarter to improve further. However, we view that the current valuation of more than 31.0x will inhibit any further upside movement in the share price. Taking all factors into consideration, we are of the view that the difficult times are over. Thus, we are upgrading the stock recommendation to NEUTRAL from SELL previously. Further catalyst to rerate the stock would be acquisition of brownfield plantation asset.

Source: MIDF Research - 27 Nov 2019