IOI’s 6MFY14 core net profit was in line with our  but above consensus.Despite  this,  we  raise  our  FY14-15  earnings  by  8-15%  to  account  for strong improvements in its manufacturing margins. We continue to like IOI  as  a  beneficiary  of  the  improving  industry  fundamentals  and  CPO price uptrend, while valuations are at  an unjustifiable 1-2x P/E discount to its big cap peers. BUY, with MYR5.11 SOP-based FV.

• In  line.    IOI’s  6MFY14  core  net  profit  was  in  line  with  our  but  above consensus  expectations,  coming  in  at  53%  and  62%  of  the  respective FY15 forecasts. The group recorded an exceptional loss of MYR11.9m in 2QFY14  comprising  mainly  translation  losses,  bringing  its  1HFY14  EI loss to MYR141.5m.  IOI declared an interim net DPS of 8 sen (2Q13: 7 sen), in line with our forecasts of 15.5 sen for FY14.
• Core net profit  slid  31%  y-o-y  on the back of  flat revenue in 1HFY14, attributable  to  lower  contributions  from  the  plantation  division  (-21%) owing to weaker CPO prices (-8%) and lower FFB production (-2%). This was offset by higher manufacturing contributions (+99% y-o-y) as EBIT margins improved (to 7.6% in 1HFY14 from 3.7% in 1H13) at all its subdivisions.  Property  contributions  jumped  24%  y-o-y  owing  to  higher progress  billings  from  its  Xiamen  project.  Contributions  from  property were  still  included  in  IOI’s  2Q14  earnings  as  the  demerger  of  IOI Properties (IOIPG MK, BUY, FV: MYR3.50) was only  completed in Jan 2014.
• Raising  forecasts  to  reflect  strong  manufacturing  earnings.  Given the strong margins seen in the manufacturing division in 1H14, we raise our margin projections for this division for FY14-15, resulting in an 8-15% increase  in  earnings.  We  keep  our  CPO  price  assumptions  of MYR2,550/tonne for FY14 and MYR2,800/tonne for FY15.
• Maintain BUY. Post earnings revision and after incorporating IOI’s latest net debt and the cash proceeds to be received from the demerger,  we revise higher our SOP-based fair value to MYR5.11 (from MYR4.83). We continue  to like  IOI  as  it  is  an  inexpensive  big-cap  plantation  play  that stands to  benefit from the  industry’s improving  fundamentals as well as CPO  price  uptrend.  IOI  continues  to  trade  at  an  unjustifiable  1-2x  P/E discount to its big-cap peers.

Financial Exhibits

SWOT Analysis

Company Profile
IOI  Corp  is  a  large  integrated  palm  oil  producer,  with  palm  oil  plantation  land  in  Malaysia  and  Indonesia.  It  also  has  downstream manufacturing facilities like refineries, oleochemical and specialty fats manufacturing plants.

Recommendation Chart

Source: RHB