KEY INVESTMENT HIGHLIGHTS

• Improvement in 2QFY20 normalised earnings lifted 1HFY20 normalised earnings to RM402.5m (+9.0%yoy)

• Plantation division recorded double digit growth in 1HFY20 due to favourable CPO price of RM2,218/mt (+2.3%yoy)

• However, FFB production declined by -5.7%yoy to 1.6m mt as yield dropped to 10.87tonnes/ha

• Declared higher dividend of 4sen in 2QFY20, in-tandem with higher earnings achieved

• Maintain Neutral with a revised TP of RM4.30

1HFY20 earnings below expectation. IOI Corporation Bhd’s (IOI) 2QFY20 normalised earnings came in at RM218.0m, an increase of +4.9%yoy. The improvement in earnings was mainly premised on higher contribution across all segments. This led to a +9.0%yoy expansion in 1HFY20 normalised earnings to RM402.5m. All in, the group’s 1HFY20 financial performance came in below ours and consensus expectation, accounting for 42.0% and 45.4% of full year FY20 earnings estimates.

Plantation. 1HFY20 segment profit improved by +13.2%yoy to RM301.9m. This was mainly attributable to higher CPO price realised, improved oil extraction rate and favourable fair value changes on biological asset. Note that the average CPO price for 1HFY20 came in at RM2,128/mt (+2.3%yoy). However, FFB production reduced to 1.6m mt from 1.7m mt previously due to the decline in FFB yield to 10.87tonnes/ha (vs 1HFY19: 11.37tonnes/ha).

Resource-based Manufacturing. The resource-based manufacturing segment recorded a -38.0%yoy decline in 1HFY20 profit to RM166.4m. This was mainly due to fair value loss on derivative financial instrument as well as lower sales volume and margins from the oleochemical subsegment.

Impact to earnings. We are lowering FY20 and FY21 FFB production forecasts to better reflect the group’s performance thus far. As a result, FY20 and FY21 earnings estimates have been reduced to RM865.1m and RM951.1m respectively.

Target Price. Post our earnings adjustment, we are reducing our target price to RM4.30 (previously RM4.67). This is premised on pegging revised FY21 eps of 15.1sen against forward PER of 28.5x which represents one standard deviation above the two-year historical average.

Dividend. Inline with healthier earnings the group declared 2QFY20 dividend of 4sen as compared to 3.5sen declared in 1FY20.

Source: MIDF Research - 19 Feb 2020