IOI Corp at ‘hold’ on worries over weakening ringgit

Analyst Report

IOI Corp Bhd

By Alliance DBS Research

Target price: RM4.30


IOI Corp Bhd reported first quarter financial year 2017 (Q1FY17) headline earnings of RM94.4mil, turning around quarter-on-quarter (q-o-q) and year-on-year (y-o-y).

Stripping out a RM172mil foreign exchange translation loss and RM56.5mil of net fair value loss on derivatives, IOI’s underlying profit of RM322.9mil was 3.4% higher y-o-y and within expectations.

The plantation segment’s earnings before interest and taxes (EBIT) rebounded to RM334.2mil.

The y-o-y improvement of 62% was primarily due to 16% higher crude palm oil (CPO) average selling price of RM2,464 per tonne.

Meanwhile, fresh fruit bunches (FFB) and CPO production recovered 22% and 27% q-o-q, respectively, after moving past the most severe phase of adverse weather conditions.

However, FFB and CPO production remained 10% and 11% lower y-o-y, given the lower yields per hectare of about 7%.

The group’s Q1FY17 manufacturing performance appeared to reflect tailwinds of the sustainability issues, though Roundtable on Sustainable Palm Oil (RSPO) certificates were restored on Aug 5.

Its EBIT of RM107.8mil was 38% lower y-o-y, though this represents a q-o-q recovery of 65%. Apart from lower oleochemical volumes, the segment was also impacted by higher raw material prices, primarily of palm kernel.

“As progress is made on IOI’s action plan on sustainability practices, we expect its manufacturing performance to normalise.

“However, the prevalence of a weaker ringgit poses risks of further translation losses, as an estimated 80% of total borrowings are US dollar-denominated,” said Alliance DBS Research.

Gamuda Bhd

By Maybank Investment Bank

Target price: RM5.55


IF the RM2.7bil price tag for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) is true, Gamuda will receive RM1.08bil cash for its 40% stake.

That said, Maybank Investment Bank expects the resolution to take a bit more time to iron out the issues.

It was recently reported that the former Menteri Besar of Selangor quoted a potential RM2.7bil price tag for Splash.

The current Selangor government is said to have decided to pay Splash an equity compensation totaling RM2.7bil, which is more than 10 times the proposed RM250.6mil equity value offer made during the former Menteri Besar’s administration.

“At RM2.7bil, this would represent a 10% discount to Splash’s book value.

“Gamuda had earlier guided of an approximate RM3bil book value for Splash to date.

“Despite the discount, we believe the RM2.7bil, if the offer comes, is still within the acceptable range. We believe that Gamuda’s sale of Splash requires shareholders’ approval,” said Maybank IB.

Gamuda had earlier guided on Splash’s sale proceeds to be used for new projects, in particular, the Penang Transport Master Plan of which Gamuda has a 60% stake in the SRS consortium awarded the Project Delivery Partner (PDP) role.

That said, the research house still does not rule out some distribution of the sale proceeds back to shareholders.

At RM2.7bil, Gamuda’s 40% stake in Splash works out to be RM1.08bil or 45 sen per share.


By UOB Kay Hian

Underweight (Maintained)

Expecting the operating environment of the Malaysian automobile sector to remain challenging in the near and medium term, UOB Kay Hian Research has maintained an “underweight” outlook on the sector.

According to the brokerage, the sector’s sales volume will remain depressed due to still-soft consumer spending, while more aggressive promotions driven by stiff competition coupled, with high input costs due to the prolonged ringgit weakness against major currencies will continue to crimp margins.

UOB Kay Hian Research has cut its 2016 total industry volume (TIV) forecast to 570,000 units (from 615,000 units), down 14.5% year-on-year (y-o-y).

It says given the lacklustre sales thus far and the still-soft consumer sentiment, it points out that the 2016 TIV would not hit the Malaysian Automotive Association’s forecast of 580,000 units.

UOB Kay Hian’s 2017 TIV forecast stands at 580,000 units, which represents a growth of 2% y-o-y.

The brokerage’s top pick is Bermaz Auto Bhd for yield play.

According to UOB Kay Hian, Bermaz Auto’s yield for the financial year ending April 30, 2017, is attractive at 6% (based on 80% payout) and could go up to 7.5% (based on 100% payout), given that it is cash rich with no debt.

The brokerage, however, remains negative on UMW Holdings Bhd, as all of the latter’s major divisions are operating in challenging environments.

In addition, UMW’s earnings will continue to be dragged down by its loss-making 55.7%-owned UMW Oil & Gas Bhd, with only two rigs (out of eight rigs) working at depressed chartered rates.

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