Maybank Research retains trading buy for IOI Corp, special dividend ahead

IOI has also taken a number of steps to improve sustainability practices, including obtaining third-party verification on its progress towards implementing sustainable policies.

KUALA LUMPUR: Maybank Investment Bank Research is maintaining its trading Buy for palm oil giant IOI Corp with an unchanged target price of RM5.03 on 29 times FY18 price-to-earnings ratio (PER), which is its historical five-year mean. 

The research house said on Monday that a 12.5 sen special dividend per share awaits investor post completion of the Loders Group disposal for 297mil euros plus US$595mil cash

“We are keeping our earnings forecasts ahead of IOI’s results release at month end. IOI remains a trading Buy for its effective capital redeployment post disposal of its lower yielding specialty fats division (Loders Group),” it said.

Maybank Research said IOI is a beneficiary of the strengthening Ringgit. This will be evident from its 2QFY6/18 headline net profit which it estimates at RM550mil (2QFY6/17: RM 16mil), lifted by forex translation gains (estimated RM200mil) and higher core profits (estimated RM350m), bringing 1HFY6/18 headline net profit to RM910mil (1HFY6/17: RM120mil). 

It also pointed out the ringgit has strengthened against the US$ by 4.3%/6.1% (to 4.0465) in 2Q/1HFY18 (end-June 2017: USD-RM rate at 4.2928). 

IOI is a prime beneficiary of a strengthened RM given its US$1.3bil debt exposure (RM5.5bil equivalent) as at end-Sept 2017. 

“We expect IOI to recognise about RM200m in forex translation gains in 2Q, bringing 1HFY6/18 accumulated gains to RM269mil (vs 1HFY6/17 forex loss: RM502mil). If the ringgit continues to strengthen in 3Q, there could be further gains in 3QFY6/18.  

Maybank Research pointed out IOI enjoyed a strong fresh fruit bunches (FFB) output recovery in 2QFY6/18 (1.02 million tonnes; +23% on-year, +17% on-quarter), bringing 1H output to 1.89 million tonnes (+11% on-year). 

The strong 2Q output will help offset lower selling prices as CPO spot price averaged just RM2,606 (-12% on-year, -3% on-quarter) during the quarter. 

“Coupled with our expectation of a relatively decent resource-based downstream contribution (given stable feedstock prices), we estimate IOI’s 2QFY6/18 core net profit at about RM350mil (flattish on-year, +20% on-quarter). This brings 1HFY6/18 core net profit to an estimated RM641mil (+5% on-year), meeting 59% of our full-year forecasts,” it said.