IOICORP (FV RM4.62 - SELL) 9MFY12 Results Review: Hit by Production Woes

IOI Corp remains a Sell with its FV reduced from RM5.38 to RM4.62 after its FY12 and FY13 earnings forecasts were revised downwards by 9.0% and 12.4%. This is on the back of poorer-than-expected yield recovery in Malaysia, which means that IOI Corp’s 4Q production will remain relatively weak after the sharp decline in 3Q. The company’s downstream business also continued to remain under pressure with EBIT falling by 30.4% this year. In light of the flattish earnings growth and an expensive valuation of 18x forward earnings, we maintain our Sell call.

Weaker than expected.  IOI Corp’s 9MFY12 core earnings came in at RM1,420.4m, which in annualized terms undershot our and consensus estimates by 10.1%  and 9.7% respectively. This weakness was largely due to the shaper-than-expected decline in FFB production.

Production disappoints. Although IOI Corp’s FFB production was 6.1% higher on a YTD basis, the production for 3Q alone fell by 28.6% q-o-q. This was much sharper than the 17.6% decline in the same period last year. For our forecast of 3.4m tonnes to be fulfilled, IOI Corp’s 4Q production needs to be higher by some 41% q-o-q. Our  earlier production expectation was too optimistic  and  hence, we are reducing our production forecast for FY12 to 3.3m, which implies that the 4Q production will be 3.3% lower than last year.

Average realized price. The company did well in realizing an average  CPO  price of RM3,107 per tonne on a YTD basis, which was 11.2% higher y-o-y but more importantly,higher than the MPOB average of RM3,053 per tonne. For 3Q alone, the realized price of RM3,146 was higher than the MPOB average of RM3,014 per tonne.

Downstream. IOI Corp’s downstream business experienced a 28.3% q-o-q decline in EBIT. For the 9M period, segment earnings plunged by 30.4%, no thanks to an uncertain global economy which  dampened demand as well as the adverse effects arising from Indonesia’s export duty structure which negatively affected margins.

Trimming earnings forecast. In line with the weaker production expectations, our FY12 and FY13 earnings forecasts have been slashed to RM1,916.0m and RM1,921.7m respectively. Our FV, which is based on 16x CY12 earnings, is cut to RM4.62. Maintain Sell on IOI Corp, being the most expensive plantation stock under our coverage at 18x forward earnings.

Source: OSK