IOI Corp - Led By Stronger Downstream Sales

Author: PublicInvest   |   Publish date: Thu, 19 May 2016, 10:25 AM 

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IOI Corp (IOI) would have posted a core net profit of RM893.9m for the 9mthFY16, making up about 76% and 81% of our and consensus full-year earnings forecasts after stripping out i) net FX translation gain on FX-denominated borrowings (RM193.8m), ii) FX loss (RM195.8m) and iii) gain on derivatives (RM242.7m). No dividend was declared for the quarter. Meanwhile, we cut our TP from RM4.86 to RM4.55 after revising down sales contribution from downstream and also our FFB production forecast as the dry weather pattern has seriously affected its productivity over the last 2 quarters. Nevertheless, we reaffirm our Neutral call.

• 3QFY16 revenue (QoQ: -3.5%, YoY: +3.9%). Group revenue was up from RM2.7bn to RM2.8bn, mainly driven by higher resource-based manufacturing sales. Upstream plantation sales fell 9.8% YoY to RM38.8m. Average CPO price recorded in 3QFY16 was RM2,263/mt vs 3QFY15’s RM2,242/mt. 1H FFB production fell 23.2% YoY to 525,281 mt., which accounted for 14% of our forecasts while OER was around 21.8% compared to 21.4% in the first 9 months. Resource-based manufacturing segment revenue climbed 4.1% YoY to RM2.8bn.
• 3QFY16 core net profit (QoQ: -35.4%, YoY: +3.6%). Plantation operating profit contracted 13.3% YoY to RM166.2m, dragged by weaker FFB production and higher production costs. Meanwhile, excluding the fair value gain on derivative financial instruments, resource-based manufacturing earnings would have gained 22% YoY to RM120.2m, mainly led by higher profit margin from the oleochemicals and the specialty oils & fats sub-segments.
• Dragged by RSPO suspension issue. We understand that the suspension of RSPO membership has led to some of its downstream specialty oils & fats clients, who are sensitive to palm oil sustainability standards such as Nestle, Kellogg, Mars and Modelez, switched their palm oil orders to other suppliers. Besides losing the CSPO premium, which makes up less than 0.5% of its revenue or about RM60m, its downstream specialty oils & fats segment, which accounted for 11% of FY15 EBIT, will be affected as well. All-in, our calculation shows that approximately about 9% of its EBIT is at risk as a result of this suspension. Meanwhile, the Group has recently announced that it is challenging the suspension of its RSPO membership as it thinks it has been “unfairly affected” by the suspension.
• Maintaining Neutral call but with a lower TP. We revise our earnings forecasts lower to factor in the impact of RSPO suspension and also change our FFB production forecasts for FY16 from +2% to -8% for FY16 while FY17 remains at 3% growth. Nevertheless, we maintain our Neutral call but with a lower TP of RM4.55.

Source: PublicInvest Research - 19 May 2016