IOI Corporation - Lack of catalyst Hold

HOLD
Fair Value RM5.65

Investment Highlights 

• We are downgrading our recommendation on IOI Corporation from BUY to HOLD, with a lower RNAV-based fair value of RM5.65/share (vs. RM5.75/share previously). 
• We believe that it would be difficult for IOI’s share price to re-rate due to a lack of catalyst. Unlike other plantation companies, earnings contributions from IOI’s Indonesia plantation division are not expected to be significant until FY14F. 
• The same argument holds for IOI’s earnings from the South Beach property development project. We reckon that earnings from the project would only be recognised much later as it is scheduled for completion only in FY15F. South Beach is estimated to command a gross development value of S$4bil. IOI’s shareholding in the project is about 49.9%. 
• IOI’s FY12 core net profit was slightly below consensus estimates and our expectations due to a 54.4% QoQ slide in manufacturing earnings in 4QFY12. 
• The group’s plantation EBIT rose 2.5% to RM1.5bil in FY12 as higher CPO prices helped compensated a decrease in palm oil production. IOI realised an average CPO price of RM3,135/tonne in FY12, 6.5% higher than the average of RM2,945/tonne recorded in FY11. 
• FFB production inched down 3.3% YoY to about 3.2mil tonnes in FY12 due to weak output in 2HFY12 resulting from lag impact of the drought which took place in early- 2010. We estimate IOI’s production cost at RM1,291/tonne in FY12 against RM1,139/tonne in FY11. 
• Manufacturing EBIT fell 29% YoY to RM287.1mil in FY12 due to challenging operating conditions in the refining and oleo-chemical industries. We believe that demand for oleochemical products was weak, which exerted downward pressure on selling prices. EBIT margin of the manufacturing division shrank from 2.8% in FY11 to 2.0% in FY12. 
• On 17 August, it was reported that IOI would be investing US$710mil in a palm oil processing plant in Xiamen. The plant would include a comprehensive headquarters with R&D, logistics and sales facilities. 
• We are neutral on this. Although China is an attractive consumer market due to its large population, the country has regulatory risks. Recall that there were “price controls” on certain consumer products from late-2010 to late-2011. In July this year, the Chinese government asked food companies to keep prices of packaged products stable.

Source: AmResearch