IOI Corp Bhd
(May 15, RM4.25)
Maintain “neutral” with reduced target price (TP) of RM3.53: IOI Corp Bhd (IOI Corp) recorded a loss of RM188 million in the third quarter of financial year 2015 (3QFY15).

Cumulatively, IOI Corp’s earnings stood at only RM8.2 million, -99.7% year-on-year (y-o-y) lower.

The slump in IOI Corp’s bottom line is attributable to the higher foreign exchange (FX) loss of RM332.7 million in 3QFY15 and RM658.5 million for the period from June to March 2015.

Excluding the FX translation loss, IOI Corp’s normalised earnings for the cumulative nine months of financial year 2015 (9MFY15) was approximately RM667 million, which were 20% and 16.2% below ours and consensus expectations, respectively.

In 3QFY15, plantation profit decreased 38% to RM191.8 million. The lower profit recorded was mainly due to the lower fresh fruit bunch (FFB) production average crude palm oil (CPO) price realised (RM2,247 per tonne (pt), -13.6% y-o-y).

For the 9MFY15 period, plantation profit stood at RM770.1 million, 11% y-o-y lower. This is also attributable to the lower CPO price realised of RM2,229pt as compared with RM2,459pt for 9MFY14.

In 3QFY15, the resource-based manufacturing (RBM) profit shrunk to RM102.9 million, 50% y-o-y lower.The lower manufacturing profit was mainly due to the lower margin from specialty oils and fats and refinery sub-segments, as well as lower sales volume from the refinery sub-segment.

This brought the 9MFY15’s profit to RM321.3 million, 53% lower compared with RM683.6 million profit in 9MFY14, mainly due to the unrealised fair value loss in foreign currency forward exchange contracts arising from weaker ringgit amounting to RM115.7 million (third quarter year-to-date [3QYTD] for FY14 — a gain of RM62.3 million).

Excluding the FX fair value loss or gain, the underlying profit for the RBM segment for 9MFY15 was at RM437 million.

This is still 30% lower than the underlying profit of RM621.3 million for 9MFY14. Again, the decline was mainly due to lower margin from all the sub-segments, as well as lower sales volume from the refinery sub-segment.

In view of the increased capacity of the downstream segment in Indonesia, we expect the margin for the RBM segment to remain depressed.

In addition, the implementation of a levy on Indonesian CPO and processed palm oil exports is expected to lend a competitive advantage to refiners in Indonesia.

With the abundant supply of CPO and processed palm oil, Indonesian refiners are enjoying cost advantage, and this allows them to sell their products at a lower price.

This situation will consequently affect the margin of the downstream products.

Besides the limited growth from the RBM segment, we also expect earnings from the plantation segment to remain muted due to uninspiring CPO price performances.

Premised on these, we have trimmed down our FY15 and FY16 earnings forecast by 23.6% and 19.6% respectively.

Due to the unpromising prospects for both IOI Corp’s RBM and plantation segments, we are maintaining our “neutral” recommendation on IOI Corp with lower TP of RM3.53 per share.

We derive our TP by pegging IOI Corp’s earnings per share 16 to price earnings ratio multiple of 20 times (EPS16 to PE multiple of 20 times), mirroring Kuala Lumpur Kepong Bhd’s PE multiple which is also involved in plantation’s upstream and downstream businesses.

No dividend has been announced for the reported quarter. — MIDF Research, May 15

This article first appeared in The Edge Financial Daily, on May 18, 2015.