We recently met up with IOI Corporation (IOICORP) and returned
feeling optimistic on the Group’s short-term and long-term prospects.
The Group is positive on CPO prices due to the implementation of
biodiesel, potential return of El Nino and the banning of trans fat in
all food products in USA. Additionally, we expect IOICORP to deliver 3%
FFB growth in FY14 and this is the highest among Malaysia big cap
planters. Lastly, its cost of production is well managed at RM1314/MT
for 9M14. Although we do expect IOICORP to be excluded from Shariah
compliant list by Nov-2014, the impact to its share price should be
limited. Note that out of the 30 top shareholders as at 30 Aug 2013,
there is only one Islamic Fund with small holdings of 0.33% of IOICORP
shares. Maintain OUTPERFORM with an unchanged TP of RM5.40 based on Fwd.
PE of 21.2x on FY15E EPS of 25.5 sen. We continue to like the stock due
to expected earnings growth in both upstream and downstream division
while keeping in mind that it is the most liquid proxy to CPO price
upside should El Nino materialize in 2H14.
Positive view on CPO prices. We gather that IOICORP is positive on CPO price based on three reasons. Firstly, biodiesel demand should drive CPO price higher with Indonesia biodiesel mandate of 3.0m MT and Malaysia’s full mandate on use of B5 in July 2014. In addition, potential return of El Nino and recent dry spell should impact CPO production and keep prices supported. Lastly, the Company believes that the banning of trans fats in all food products in USA should lead to better demand for palm oil. Separately, we gather from a media report which quoted IOICORP CEO (Dato' Lee Yeow Chor) view that CPO prices may advance to RM2650/MT to RM2850/MT should El Nino occurs. Our view of average CPO prices of RM2800/MT for CY2014 is more bullish than the management possibly due to higher soybean oil prices assumption as we believe that China demand should improve in 2H14 in line with better economy prospect seen.
FFB growth of 3% expected for FY14 and this is the best among big cap planters. Management guided for flattish FFB growth in FY14, but we believe that IOICORP is on track to meet our forecast of 3% FFB growth to produce 3.52m MT of FFB. For the first 11 months of FY14, the Company’s FFB volume has achieved 3.23m MT and this is already 92% of our forecast of 3.52m MT for the whole FY14. Although the 3% FFB growth seems low, we wish to highlight that it is the highest among Malaysia big cap planters as compared to SIME (8% FFB decline YoY) and KLK (0% FFB growth YoY) for the same period. This could be attributed to additional contribution from Unico-Desa Plantations acquisition, which has started contribution from Jan-2014 onwards.
Flattish cost expected for FY14. For 9M14, IOICORP achieved production cost of RM1314/MT which is almost similar to FY13 production cost. Although labor cost has increased, this is neutralized by lower fertilizer cost. Overall, this is within our expectation.
Likely to be excluded from Shariah compliant list by Nov-2014 but impact to share price should be limited. As of end-March 2014 or 3QFY14, we estimate that IOICORP “Conventional Debts/Asset” (CDA) ratio is 51% and this is ahead of Securities Commission (SC) threshold of 33%. With only 2 weeks to go before IOICORP's financial year end comes to end on 30-Jun-2014, we think that IOICORP FY14 CDA ratio is likely to stay above 33% and hence is poised to be excluded from Shariah list in the next SC review on Nov-2014. Nevertheless, the impact on share price should be limited. Note that out of the 30 top shareholders as at 30 Aug 2013, there is only one Islamic Fund with small holdings of 0.33% of IOICORP shares.
Maintain OUTPERFORM with an unchanged TP of RM5.40 based onFwd. PE of 21.2x on FY15E EPS of 25.5 sen. Our Target PE of 21.2x is derived from the same Target PE for KLK, which is at +1SD of its historical mean due to our bullish view on CPO prices. We have chosen KLK valuation as it is more reflective of current IOICORP structure as pure plantation play (against old IOICORP structure, which has significant earnings contribution from property division). Overall, we continue to like IOICORP as its upstream plantation should generate better earnings in both FY14 and FY15 due to better CPO prices YoY. We also expect its downstream division to benefit from economy recovery in Europe and US due to its expertise in oleochemicals and specialty oils. Should El Nino occur in 2H14, IOICORP would be the most liquid proxy to CPO price upside.
Source: Kenanga
Positive view on CPO prices. We gather that IOICORP is positive on CPO price based on three reasons. Firstly, biodiesel demand should drive CPO price higher with Indonesia biodiesel mandate of 3.0m MT and Malaysia’s full mandate on use of B5 in July 2014. In addition, potential return of El Nino and recent dry spell should impact CPO production and keep prices supported. Lastly, the Company believes that the banning of trans fats in all food products in USA should lead to better demand for palm oil. Separately, we gather from a media report which quoted IOICORP CEO (Dato' Lee Yeow Chor) view that CPO prices may advance to RM2650/MT to RM2850/MT should El Nino occurs. Our view of average CPO prices of RM2800/MT for CY2014 is more bullish than the management possibly due to higher soybean oil prices assumption as we believe that China demand should improve in 2H14 in line with better economy prospect seen.
FFB growth of 3% expected for FY14 and this is the best among big cap planters. Management guided for flattish FFB growth in FY14, but we believe that IOICORP is on track to meet our forecast of 3% FFB growth to produce 3.52m MT of FFB. For the first 11 months of FY14, the Company’s FFB volume has achieved 3.23m MT and this is already 92% of our forecast of 3.52m MT for the whole FY14. Although the 3% FFB growth seems low, we wish to highlight that it is the highest among Malaysia big cap planters as compared to SIME (8% FFB decline YoY) and KLK (0% FFB growth YoY) for the same period. This could be attributed to additional contribution from Unico-Desa Plantations acquisition, which has started contribution from Jan-2014 onwards.
Flattish cost expected for FY14. For 9M14, IOICORP achieved production cost of RM1314/MT which is almost similar to FY13 production cost. Although labor cost has increased, this is neutralized by lower fertilizer cost. Overall, this is within our expectation.
Likely to be excluded from Shariah compliant list by Nov-2014 but impact to share price should be limited. As of end-March 2014 or 3QFY14, we estimate that IOICORP “Conventional Debts/Asset” (CDA) ratio is 51% and this is ahead of Securities Commission (SC) threshold of 33%. With only 2 weeks to go before IOICORP's financial year end comes to end on 30-Jun-2014, we think that IOICORP FY14 CDA ratio is likely to stay above 33% and hence is poised to be excluded from Shariah list in the next SC review on Nov-2014. Nevertheless, the impact on share price should be limited. Note that out of the 30 top shareholders as at 30 Aug 2013, there is only one Islamic Fund with small holdings of 0.33% of IOICORP shares.
Maintain OUTPERFORM with an unchanged TP of RM5.40 based onFwd. PE of 21.2x on FY15E EPS of 25.5 sen. Our Target PE of 21.2x is derived from the same Target PE for KLK, which is at +1SD of its historical mean due to our bullish view on CPO prices. We have chosen KLK valuation as it is more reflective of current IOICORP structure as pure plantation play (against old IOICORP structure, which has significant earnings contribution from property division). Overall, we continue to like IOICORP as its upstream plantation should generate better earnings in both FY14 and FY15 due to better CPO prices YoY. We also expect its downstream division to benefit from economy recovery in Europe and US due to its expertise in oleochemicals and specialty oils. Should El Nino occur in 2H14, IOICORP would be the most liquid proxy to CPO price upside.
Source: Kenanga
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