IOI Corporation - Strong headline profits

Author: kltrader   |   Publish date: Thu, 19 May 2016, 11:45 AM 

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Earnings momentum sustained

IOI posted a sequentially stronger headline net profit in 3QFY16, boosted by forex translation gains and fair valuation (FV) gains on financial instruments. Pending an update, we are keeping our earnings forecasts. But we believe recent selldown due to its RPSO suspension is overdone. We maintain our contrarian BUY with an unchanged TP of MYR4.59.

Above expectations, boosted by stronger MYR

IOI posted a headline 3QFY16 net profit of MYR748m (3QFY15: loss of MYR188m, +3% QoQ) as it benefited from the stronger MYR against USD (+10% QoQ) which led to MYR433m in unrealised forex translation gains. Adjusted, 3QFY16 core net profit was MYR316m (+118% YoY, -37% QoQ). 3QFY16 core earnings were also boosted by FV gain on financial instruments (MYR185m) used to hedge its USD export sales proceeds. This lifted 9MFY16 core net profit to MYR948m (+42% YoY), which met 103%/89% of our / consensus expectations; above expectations.

Downstream offsets seasonally weak upstream

IOI recorded a lower upstream EBIT of MYR141m (-19% YoY, -54% QoQ) in 3QFY16 on lower FFB output (0.53m MT; -23% YoY, -44% QoQ) due to El Nino. For 10MFY16, output declined to 2.62m MT (-10% YoY) which met 85% of our FY16 forecast. Higher sequential spot CPO ASP of MYR2,263/t (+1% YoY, +6% QoQ) was insufficient to offset the weak output. Downstream outperformed with EBIT of MYR305m (+215% YoY, -17% QoQ) due to higher contribution from oleochemicals and specialty oils & fats sub-segments. Excluding MYR185m in FV gain on financial instruments, the underlying downstream EBIT was MYR120m (+44% YoY, +8% QoQ).

A contrarian BUY

We are keeping our earnings forecasts pending an update. We also retain our contrarian BUY and TP of MYR4.59 on 30x FY17 PER, +1SD of historical mean. IOI is a sector bellwether and a good proxy to an El Nino induced CPO price rally post RSPO overhang.
Source: Maybank Research - 19 May 2016