Despite being one of the most liquid and efficient big-cap planters in Malaysia, we believe valuations are already at fair levels. No change to our NEUTRAL recommendation with higher SOP-based TP of MYR4.65 (2% upside), which implies an EV/ha of USD40,000 – the top end of the historical range for the sector. We highlight that every MYR100/tonne change in the price of CPO could affect IOIC’s earnings by 3-5%, which is not as sensitive as other pure upstream players.

Liquid but pricey stock. Although IOI Corp (IOIC) remains one of the most liquid and efficient big-cap planters in Malaysia, we believe valuations are already at fair levels, with 2016 P/E already at 25x, which is 2SD above its mean, while EV/ha of USD42,000 is the priciest amongst its peers. El Nino impact coming through. IOIC’s weaker-than-expected FFB production in 2QFY16 of -6.8% YoY is already starting to demonstrate the impact of El Nino, particularly since 66% of IOIC’s planted landbank is in Sabah, which faced significant dryness in 1Q15/2Q15. Given the weakness seen so far, and expecting FFB production to remain weak in the next two quarters, we lower our FFB production growth projections to reflect a 5.8% decline for FY16, followed by a 3-6% rise for FY17-18. We continue to expect decent margins for the downstream division, although this could be offset by lower refinery margins, given Indonesia’s price advantage. Forecasts and risks. All in, we cut our FY16F-18F earnings forecasts by 5-7%. Key risks include the reversal of CPO price trends as well as weaker-than-expected demand.

Maintain NEUTRAL. We raise our SOP-based TP to MYR4.65 (vs MYR4.55), after adjusting for IOIC’s latest net debt and raising our plantation division target P/E to 20x 2016 (from 19x). This implies an EV/ha of USD40,000/ha, close to the top of the historical EV/ha range for the sector. In Malaysia, we prefer KL Kepong (KLK MK, BUY, TP: MYR26.40) for a big-cap pick.

Financial Exhibits

SWOT Analysis

Source: RHB Research - 22 Feb 2016