Maintain hold with a higher target price of RM4.62: IOI Corp Bhd’s first quarter of financial year 2020 (1QFY20) revenue was lower by 5.3% year-on-year (y-o-y) at RM1.8 billion due to a lower contribution from its resource-based manufacturing division (-5.8%), partially mitigated by a slightly higher contribution from its plantation division (+3.1%). However, IOI Corp’s profit before tax (PBT), inclusive of a net foreign-currency translation loss on foreign currency-denominated borrowings as well as fair value gains on derivative financial instruments in the resource-based manufacturing division, improved slightly by 1.7% y-o-y to RM198.6 million, attributable to a better performance of the resource-based manufacturing division due to higher sales volume and margins for its refining subsegment, partially offset by lower profit from its plantation division due to weaker crude palm oil (CPO) and palm kernel (PK) average selling prices (ASPs). In 1QFY20, IOI Corp’s CPO and PK ASPs were lower at RM2,014 per tonne and RM1,126 per tonne respectively against RM2,236 per tonne and RM1,766 per tonne in 1QFY19. After excluding foreign exchange (forex) and other one-off items, its core net profit (CNP) declined by 9.3% y-o-y to RM168 million for 1QFY20, accounting for 21% of our previous forecast and 20% of the street’s expectation for FY20.

IOI Corp’s revenue increased by 2.1% quarter-on-quarter (q-o-q) to RM1.8 billion for 1QFY20, while PBT surged by over 100% q-o-q to RM198.6 million. The higher profit was due to better performances of the plantation and resource-based manufacturing divisions. After excluding forex and other one-off items, its CNP increased by 8.7% q-o-q to RM168 million for 1QFY20.

We expect IOI Corp’s future earnings to improve, mainly driven by a recovery in CPO prices. We raise our core earnings per share estimates by 5%-11% for FY20-FY22 after taking into account a higher contribution from the plantation division. For IOI Corp, we expect CPO prices to average RM2,350-RM2,650 per tonne for FY20-FY22, up from RM2,250-RM2,450 per tonne previously. In our view, growth in demand for palm oil products should be stronger than the production growth rate. This should help lower the global palm oil inventory level and boost prices. — Affin Hwang Capital, Nov 27