KUALA LUMPUR: CIMB Equities Research is upgrading IOI Corporation Bhd
to Hold from Reduce as the 16% decline in IOI’s share price following its suspension from the Roundtable on Sustainable Palm Oil (RSPO) certifications has priced in concerns over this issue.
The research house said on Thursday it expected share price support for the plantation giant from the potential buyback exercise.
“We maintain our EPS forecasts and sum-of-parts based target price of RM4.52 per share,” it said.
IOI Corp’s 9MFY6/16 core net profit (excluding forex translation loss) accounted for 92% of the research house’s full-year forecast and 86% of consensus estimates.
“We consider the results to be broadly in line as we project lower 4Q earnings due to weaker manufacturing earnings as the group was suspended from RSPO certification since April 2016. Reported net profit was lower due to forex translation losses of RM194mil in 9M16 on its foreign debts,” it said.
The 3Q16 core net profit rose 118% on-year due mainly to higher resource-based manufacturing EBIT as well as fair value gain on derivatives.
“IOI posted a fair value gains on derivative financial instruments of RM185mil (2QFY16: RM261mil and 3QFY15: RM18mil). We gather that the derivatives gain relates to forward contracts it entered into as a hedge to protect its ringgit-denominated manufacturing margins,” it said.
CIMB Research said plantation EBIT fell 19% on-year in 3Q due to a 23% on-year decline in FFB output as the Sabah region was impacted by a rainfall deficit due to the ongoing El Nino. These more than offset the higher CPO and PK prices achieved.
IOI booked a forex translation gain of RM433mil on its foreign denominated borrowings of RM7.43bil due to the stronger ringgit.
This helped to pare down the forex translation loss for 9MFY16 to RM194m. Approximately 80% of its total debts are made up of US$-denominated loans.
“The group expects CPO prices to remain firm at between RM2,500 to RM2,700 per tonne level which is positive for its plantation division.
“However, the resource-based manufacturing segment is expected to face challenges in the next few months due to the suspension from RSPO certifications in April 2016. The group is working towards lifting the suspension and hopes to implement all the action plans as required by the RSPO by end-May 2016,” said CIMB Research.
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