KEY INVESTMENT HIGHLIGHTS

• 3QYF20 normalised earnings dropped by -54.9%yoy to RM77.0m, negatively impacted by downstream segment

• This led to 9MFY20 normalised earnings of RM479.5m (- 11.2%yoy), below ours and consensus expectations

• Drastic decline in FFB yield remains a concern, which would limit the potential upside from recovery in CPO price

• Current valuation of close to 30x appears stretched at this juncture

• Downgrade to SELL with a revised TP of RM3.58

9MFY20 earnings below expectation. IOI Corporation Bhd’s (IOI) 3QFY20 normalised earnings came in at RM77.0m, a decrease of - 54.9%yoy. This was despite higher revenue of RM2,033.9m (+7.6%yoy). The decline in earnings was mainly brought about by lower contribution from the resource-based manufacturing segment. This led to a -11.2%yoy contraction in 9MFY20 earnings to RM479.5m. All in, the group’s 9MFY20 financial performance came in below ours and consensus expectation, accounting for 55.4% and 57.4% of full year FY20 earnings estimates respectively.

Plantation. 9MFY20 segment profit improved by +17.0%yoy to RM467.3m. This was mainly attributable to higher CPO price realised and improved oil extraction rate. Note that the average CPO price for 9MFY20 came in at RM2,294/mt (+12.5%yoy). However, FFB production reduced to 2.2m mt from 2.6m mt previously due to the delayed effects of the dry weather in 2018.

Resource-based Manufacturing. The resource-based manufacturing segment 9MFY20 underlying profit came in at RM294.6m, a decline of - 27.2%yoy. This was mainly due to lower operation contributions from the oleochemical and refining sub-segments with reduction in margins and sale volume.

Impact to earnings. We are revising our CY20/21/22 CPO price target to RM2,300/2,450/2,600mt respectively. In addition, we also reduce the contribution stemming from the downstream segment. As a result, our FY20/21/22 earnings have been revised to RM609.0/786.0/874.1m respectively.

Target Price. Post our earnings adjustments, we are reducing our target price to RM3.58 (previously RM4.30). This is premised on pegging revised FY21 eps of 12.5sen against forward PER of 28.6x.

Downgrade to SELL. The recovery in CPO price has supported the upstream segment. However, we are disappointed by the drastic drop in FFB yield which has led to double digit decline in FFB production. As such, we view that the positive impact of further recovery in CPO price would be limited in the coming quarters. In addition, we are also concerned with the performance of the resource-based manufacturing in view of the declining in sale volume and contraction in profit margin. This would further affect the earnings capability of the group. In terms of valuation, we view it is rather stretched for IOI at this juncture given the subdued performance. All factors considered, we are downgrading our recommendation for IOI to SELL from NEUTRAL previously.

Source: MIDF Research - 28 May 2020