CIMB Research maintains reduce on IOI Corp, ups target price to RM4.52

IOI Corp's plantation in Johor

KUALA LUMPUR: CIMB Research has raised IOI Corp Bhd’s FY16-18 earnings per share (EPS) forecasts by 5% to reflect higher palm kernel prices and lower estates costs.

“Our SOP-based target price rises to RM4.52 as we accord a higher P/E of 22 times (versus 20 times) for its plantation division with the group’s reinstatement into the Shariah list. The stock remains a ‘reduce’ due to its rich valuation,” the research house said.

CIMB Research said IOI Corp recently lowered its fresh fruit bunches (FFB) output growth target to 1-3% due to the El Nino effect.

It projects crude palm oil (CPO) prices remaining firm and its oleo and specialty fats divisions to perform satisfactorily. It indicated that the refining business remains challenging and refineries margin has recently turned negative again.

“IOI Corp’s first half to Dec 31, 2015 core net profit (excluding forex translation loss) accounted for 64% of our full-year forecast and 58% of consensus estimates.

“We consider the results to be above expectations due to higher-than-expected plantation contributions and fair value gains on derivatives. Reported net profit was below due to forex translation losses of RM627mil in first half of FY15 on its foreign debts with the weaker ringgit. As expected, it declared an interim dividend of 3.5 sen,” CIMB Research said.

The research house said IOI Corp’s second quarter to Dec 31, 2015 core net profit rose 70% year-on-year due mainly to stronger plantation earnings and fair value gain on its derivative instruments.

Plantation earnings before interest and tax (EBIT) rose 14% with better results from its Indonesian plantations following the completion of a new mill, higher palm kernel prices and sales of inventories. These more than offset the lower CPO price achieved and FFB output in second quarter.

Resource-based manufacturing EBIT grew 236% due to fair value gains on derivative financial instruments of RM256.4mil.  

“We gather the derivatives gain relates to forward contracts it entered into as a hedge to protect the ringgit-denominated margin of its manufacturing margins. Excluding the derivatives gain, this division’s EBIT fell 50% year-on-year due to lower sales volume and lower margins from the oleochemical and refining sub-segments,” CIMB Research said.