This article first appeared in The Edge Financial Daily on August 30, 2017

IOI Corp Bhd
(Aug 29, RM4.51)
Maintain hold with a lower target price of RM4.49: IOI Corp Bhd’s final core net profit (excluding foreign exchange [forex] translation losses and gain on sale of assets) for financial year 2017 (FY17) of RM1.03 billion was below expectations, as it made up only 85% of our full-year forecast and 90% of the consensus full-year estimate. The weaker performance was due mainly to higher derivative losses and a lower profit margin from its resource-based manufacturing. As expected, the group declared a second interim dividend of five sen, bringing the full-year dividend to 9.5 sen.

IOI’s final core net profit grew 9% year-on-year (y-o-y) as stronger plantation (+44.1%) and associate earnings (+45.3%) more than offset weaker contributions from the manufacturing division (-23%) and fair value (FV) derivatives losses of RM58 million. Its core net profit for the fourth quarter of FY17 (4QFY17) grew more than threefold due to higher contributions from all its key divisions. On a quarter-on-quarter (q-o-q) basis, 4QFY17 core net profit fell 4% due to weaker contributions from its associates.

IOI turned around to report a net profit in 4QFY17 versus a net loss in 4QFY16 due mainly to a net forex translation gain of RM112 million on its foreign-denominated debt versus a RM125 million forex loss in 4QFY16. The forex gain in 4QFY17 helped narrow the forex loss registered for FY17 to RM298.8 million. The forex gain in 4QFY17 was driven mainly by a stronger ringgit versus the US dollar. Plantation earnings before interest and tax (Ebit) grew 41% y-o-y to RM234 million in 4QFY17 due to higher crude palm oil (CPO) prices (+13% to RM2,805/tonne) and a 12% rise in fresh fruit bunch (FFB) output as palm trees recovered from the El Nino impact. On a q-o-q basis, plantation Ebit grew 17% as higher FFB output trumped lower CPO prices. The group expects its FFB output to rise on the back of higher yields and more young trees entering prime production age. The group has indicated that the palm oil price outlook has softened in recent months due to an anticipated increase in production. As for its manufacturing division, the group has indicated that the performance of its oleo division has improved due to lower and more stable feedstock costs.

IOI cancelled all of its accumulated 177.95 million treasury shares with a carrying amount of RM783.4 million or an average price of RM4.40 per share on June 29. This has reduced the group’s share capital base by 2.7% and is positive for shareholders. — CIMB Research, Aug 29