This article first appeared in The Edge Financial Daily on November 14, 2018
IOI Corp Bhd
(Nov 13, RM4.35)
Downgrade to reduce with a lower target price (TP) of RM4.02: IOI Corp Bhd’s first quarter of financial year 2019 (1QFY19) core net profit (excluding foreign exchange or forex loss) of RM205 million was below expectations as it made up only 20% of our full-year forecast and 21% of consensus full-year estimate. The weaker performance was mainly due to lower plantation contribution as a result of weaker-than-expected crude palm oil (CPO) prices as well as fresh fruit bunch (FFB) output in 1QFY19.
1QFY19 core net profit fell 30% year-on-year (y-o-y) mainly due to lower plantation earnings before interest and tax (Ebit). Plantation Ebit fell 62% y-o-y and 6% quarter-on-quarter (q-o-q) in 1QFY19 due to lower FFB production as well as weaker CPO and palm kernel (PK) selling prices. The average CPO price realised fell 15% y-o-y and 7% q-o-q to RM2,255 per tonne but was above Malaysia Palm Oil Board’s average CPO price of RM2,192 per tonne for the same period. Plantation earnings would have been weaker in 1QFY19 if not for fair value gains of RM8.9 million on biological assets.
IOI Corp posted a 21% y-o-y rise in 1QFY19 manufacturing Ebit to RM129.2 million, mainly due to a higher share of contribution from its oleo associates and RM20.2 million fair value gains on derivative instruments. Excluding this, the group reported a 26% y-o-y decline in manufacturing Ebit due to lower sales volume and refining margins.
IOI Corp’s reported net profit fell at a higher 60%, mainly due to net forex translation losses of RM61.1 million on its foreign-denominated debts and deposits in 1QFY19 due to a weaker ringgit versus the US dollar. IOI Corp had RM4.2 billion of borrowings denominated in US dollars as at Sept 30, 2018, accounting for 79% of the group’s total borrowings of RM5.3 billion. The group expects CPO prices to be well supported at between RM2,000 per tonne and RM2,250 per tonne until the beginning of 2019. The group predicts 2QFY19 results to be weaker q-o-q due to lower CPO prices.
We cut our earnings forecasts for FY19 to FY21 by 7% to 17% to reflect lower CPO price assumptions. In line with the earnings per share cuts, we downgrade our sum-of-parts-based TP to RM4.02 as the current share price appears fully valued in view of unexciting near-term earnings prospects due to lower CPO prices and rising costs on the back of a higher minimum wage. Key upside or downside risks are higher or lower CPO prices and FFB output. — CGSCIMB Research, Nov 13