IOI Corporation - Feeling the brunt of low CPO prices

Period    2Q13 and 1H13

Actual vs. Expectations  The 1H13 core net profit of RM784m* was below the consensus as it made up only 43% of the consensus forecast of RM1.82b. However, it was within our estimate as it made up 53% of our forecast of RM1.07b.

 We believe that the consensus may have overestimated the CPO price performance in 1H13, which had weakened from Oct onwards due to an inventory surge.

Dividends   As expected, an interim single tier dividend of 7.0 sen was declared.

Key Results Highlights  YoY, the 1H13 core net profit tumbled by 27% to RM784m as CPO prices declined 16% to RM2585/mt. The FFB production improved 3% to 1.93m mt but this was below its peers and could be caused by the company’s aging oil palm trees. The downstream division’s EBIT improved 68% to RM232m but its total contribution at the group level is smaller at 16% (against plantation’s 46%).

 QoQ, the 2Q13 core net profit improved 27% to RM439m due to the significantly better downstream division’s EBIT (+165% to RM166m) and that of the property division (+20% to RM122m). These have more than offset the lower EBIT from the plantation division (-25% to RM282m), which suffered the brunt of the low CPO prices (-22% to RM2292/mt). We gather that the downstream division’s margin has increased in the oleochemical and refinery subsegments, possibly due to low feedstock cost. The better result in the property division was caused by a higher development profit recognised in 2Q13.

Outlook   In the short term, low CPO prices should cause IOI earnings to drop 19% in FY13E. Even for the longer term, the structural issue of its aging trees should keep its earnings growth limited.

Change to Forecasts  Maintaining our FY13E-FY14E core net profits of RM1.47b-RM1.60b.

Rating  Maintain UNDERPERFORM

 A possible FY13E consensus earnings downgrade for IOI should cause pressure on the share price.

Valuation    Maintaining our Target Price of RM4.34 based on an unchanged Fwd. PER of 18.1x on CY13E EPS of RM23.95 sen.

Risks   Better than expected CPO prices.  

Source: Kenanga