Review

• IOI’s 1HFY17 results came in within expectations. Excluding disposal gains and other non-core items, the core profit increased by 26.9% YoY to RM670.3mn, mainly due to higher contribution from the plantation business. The core net profit accounted for 57% and 59% of ours and consensus’ full-year estimates respectively.

• Plantation: Despite lower FFB production, operating profit increased sharply by 40.0% YoY to RM673.8mn in 1HFY17, thanks to higher crude palm oil (CPO) and palm kernel (PK) prices. Average selling price of CPO for 1HFY17 stood at RM2,614/tonne (+22.3% YoY). Meanwhile, PK price has also increased by 83.2% YoY to RM2,745/tonne.

• Manufacturing: The manufacturing segment reported a lower operating profit of RM273.1mn (-4.0% YoY) for 1HFY17. This was mainly due to lower sales volume and lower margin from the oleochemical sub-segment as a result of high raw material cost –palm kernel.

• The group has declared an interim single-tier dividend of 4.5sen/share for the quarter under review. This is higher than 3.5sen/share declared last year.

Impact

• No change to our earnings forecasts.

Outlook

• Management guided that the manufacturing division will continue to be affected by high raw material cost.

• On the other hand, management opines that the CPO and PK prices will not be significantly impacted by the seasonal increase in production.

• We believe that the suspension lift may take some time to reflect in the earnings as some of IOI’s customers had already switched to more reliable RSPO-certified suppliers. Thus, this may cause some difficulties for IOI to win back its lost customers.

Valuation

• Target price is maintained at RM3.66/share, based on SOPs valuation. The target price implies a CY16 PER of 18.9x, which already fairly reflects earnings potential from higher CPO price ahead. The stock remains as Sell on valuation ground.

Source: TA Research - 21 Feb 2017