IOI Corp Bhd
(Feb 16, RM4.74)
Downgrade to neutral with a lower target price (TP) of RM4.55. Due to the lacklustre results and weaker ringgit during the quarter, we have reduced our earnings forecast by 17% to 21% for the financial year ending June (FY15) and FY16 to RM1.25 billion and RM1.38 million, respectively. 

As such, we reduce our target price to RM4.55 from RM5.52 based on an unchanged target price-earnings ratio (PER) of 22 times. 

Due to the limited upside, we downgrade our call on the stock to “neutral” from “buy”.

IOI Corp’s six-month cumulative core net profit for FY15 of RM522 million came in below expectations at 37% of our and 42% of consensus full-year estimates. 

On a core basis, net earnings were down by 25% year-on-year (excluding unrealised fair value loss in foreign currency forward contracts from resource-based manufacturing amounting to RM123.8 million). 

Net margins declined from 11% to 9% due to lower margins from the resource-based manufacturing division where margins were halved. 

A higher effective tax rate (73% against 33% in the first quarter [1Q] of FY15) was also attributable to non-allowable unrealised foreign exchange losses and other non-allowable expenses incurred.

Quarter-on-quarter, core earnings improved by 28% on higher plantation profit from higher fresh fuit brunch production and lower cost. However, this was offset by lower crude palm oil prices at RM2,187 per tonne against RM2,424 per tonne in 1QFY15. 

Resource-based manufacturing profit increased by 69% due to higher margins coupled with increased sales from oleochemical segments.

The group has declared an interim dividend of 4.5 sen in the quarter, which is 44% lower than in the corresponding quarter a year ago. This translates into a dividend yield of 0.9%. — BIMB Securities Research, Feb 16

This article first appeared in The Edge Financial Daily, on February 17, 2015.