This article first appeared in The Edge Financial Daily on November 21, 2017

IOI Corp Bhd
(Nov 20, RM4.44)
Maintain hold call with a target price (TP) of RM4.74: IOI Corp Bhd’s first quarter ended Sept 30, 2017 (1QFY18) core net profit (excluding foreign exchange [forex] translation gain) was broadly in line, accounting for 26% of our full-year forecast and 25% of consensus estimates.

IOI Corp has classified 100%-owned Loders Croklaan’s (Loders) contribution as “discontinuing operations” in the latest results, due to its plans to sell 70% of its stake in Loders to Bunge.

We have included Loders’ contributions in our financial numbers in our analysis, as the disposal has not been completed.

The 1QFY18 core net profit grew 9% year-on-year (y-o-y) as stronger resource-based manufacturing and associates earnings more than offset weaker plantation earnings before interest and tax (Ebit).

The manufacturing Ebit (ex-FV derivatives gain/loss) grew 232% due to higher profit margins from the oleochemical and refining segments.

However, this was offset by a weaker plantation performance and contribution from Loders (-87% y-o-y). Plantation Ebit fell 7% due to lower fresh fruit bunch (FFB) output (-0.4% y-o-y), average selling price for palm kernel (-12.3% y-o-y) and higher operating costs.

IOI Corp posted a stronger 42% quarter-on-quarter (q-o-q) rise in its core net profit for 1QFY18 due to better performances from all of its key divisions.

Plantation Ebit grew 19% q-o-q to RM278 million in 1QFY18 as higher FFB output and palm kernel prices trumped weaker crude palm oil (CPO) prices.

Manufacturing Ebit (ex-FV derivatives gain/loss) grew 62% q-o-q in 1QFY18 due to higher contributions from oleo, thanks to higher sales volumes and margins.

IOI Corp’s reported net profit rose 243% y-o-y to RM360 million in 1QFY18 due mainly to a net forex translation gain of RM69 million on its foreign-denominated debt versus a RM172 million forex loss in 1QFY17.

The forex gain in 1QFY18 was driven mainly by the stronger ringgit versus US dollar. IOI Corp had RM5.5 billion (or US$1.3 billion) of borrowings denominated in the US dollar as at Sept 30, 2017. The US dollar borrowings accounted for 81% of the group’s total borrowings of RM7.3 billion.

The group expects its FFB output to rise as FFB yields from the estates are expected to recover from the El Nino effect. IOI Corp expects the plantation segment to do well in view of this and the prevailing high CPO price.

As for its manufacturing division, the group expects the oleo segment to do well due to improving global economies, and the specialty oil and fats segment to benefit from the impending trans-fat ban in mid-2018. — CIMB Research, Nov 18