IOI Corp Bhd (Nov 21, RM4.97)
Downgrade to sell at RM5.05 with target price of RM4.50: IOI Corp recorded a net profit of RM258 million (-52.9% quarter-on-quarter [q-o-q], -48.2% year-on-year [y-o-y]) for 1QFY12. The results were way below expectation due to unrealised foreign exchange losses of RM271.7 million. Excluding this, 1QFY12 net profit was RM530 million (-3.3% q-o-q, +6.4% y-o-y), in line with expectation. Higher fresh fruit bunch (FFB) production has boosted the plantation division’s contribution. However, weakening downstream business and property divisions were a drag on net profit.
IOI’s FFB production grew 8.1% in 1QFY12. However, we expect some contraction in 2QFY12 production growth due to potential heavy rainfall from La Nina by this December and January and the 22- to 24-month impact of the 2009/10 El Nino. If La Nina is extended to April/May 2012, production will be lower than expected. We project a 7% to 9% growth in production for FY12.
IOI continued to suffer from lower sales and margins for its oleochemical and speciality fats products. This was attributable to stiff competition from Indonesian players and weakness in the European markets. IOI recorded a lower margin for its refineries segment, contrary to our expectation that refining margin would improve due to high prices on the back of high biodiesel demand. IOI’s downstream operation is expected to continue to suffer given the uncertainty and economic slowdown in Europe as it has significant exposure to the European market and with the new export tax structure that favours Indonesian downstream players.
Its property division is likely to stay weak due to the slowdown in the property market. Developers are slowing down their launches, anticipating a weak property market in Malaysia. On the other hand, IOI is embarking on a larger joint venture project in Singapore with City Development’s South Beach, located in downtown Singapore. It has an estimated gross development value of S$3.1 billion (RM7.6 billion) and completion is scheduled in 2015. We expect the project to start contributing 5% to 7% to IOI’s pre-tax profit in FY14.
We are maintaining our earnings estimates as the lower performance in 1QFY12 was due mainly to the unrealised forex losses from its US$1.3 billion (RM9.8 billion) loan.
We forecast earnings per share of 31.9 sen, 34 sen and 39 sen for FY12 to FY14.
We downgrade IOI to “sell” as the current price is above our target price after the recent price rally. Our target price is RM4.50, based on sum-of-the-parts, implying 13 times FY13F earnings per share. Investors should lock in profit from the recent share price strength. Its performance is likely to lag its peers’ due to declining FFB yield and past-prime acreage which is also due for replanting soon, and this would affect production and bottom line. — UOBKayHian, Nov 21
This article appeared in The Edge Financial Daily, November 22, 2011.
Downgrade to sell at RM5.05 with target price of RM4.50: IOI Corp recorded a net profit of RM258 million (-52.9% quarter-on-quarter [q-o-q], -48.2% year-on-year [y-o-y]) for 1QFY12. The results were way below expectation due to unrealised foreign exchange losses of RM271.7 million. Excluding this, 1QFY12 net profit was RM530 million (-3.3% q-o-q, +6.4% y-o-y), in line with expectation. Higher fresh fruit bunch (FFB) production has boosted the plantation division’s contribution. However, weakening downstream business and property divisions were a drag on net profit.
IOI’s FFB production grew 8.1% in 1QFY12. However, we expect some contraction in 2QFY12 production growth due to potential heavy rainfall from La Nina by this December and January and the 22- to 24-month impact of the 2009/10 El Nino. If La Nina is extended to April/May 2012, production will be lower than expected. We project a 7% to 9% growth in production for FY12.
IOI continued to suffer from lower sales and margins for its oleochemical and speciality fats products. This was attributable to stiff competition from Indonesian players and weakness in the European markets. IOI recorded a lower margin for its refineries segment, contrary to our expectation that refining margin would improve due to high prices on the back of high biodiesel demand. IOI’s downstream operation is expected to continue to suffer given the uncertainty and economic slowdown in Europe as it has significant exposure to the European market and with the new export tax structure that favours Indonesian downstream players.
Its property division is likely to stay weak due to the slowdown in the property market. Developers are slowing down their launches, anticipating a weak property market in Malaysia. On the other hand, IOI is embarking on a larger joint venture project in Singapore with City Development’s South Beach, located in downtown Singapore. It has an estimated gross development value of S$3.1 billion (RM7.6 billion) and completion is scheduled in 2015. We expect the project to start contributing 5% to 7% to IOI’s pre-tax profit in FY14.
We are maintaining our earnings estimates as the lower performance in 1QFY12 was due mainly to the unrealised forex losses from its US$1.3 billion (RM9.8 billion) loan.
We forecast earnings per share of 31.9 sen, 34 sen and 39 sen for FY12 to FY14.
We downgrade IOI to “sell” as the current price is above our target price after the recent price rally. Our target price is RM4.50, based on sum-of-the-parts, implying 13 times FY13F earnings per share. Investors should lock in profit from the recent share price strength. Its performance is likely to lag its peers’ due to declining FFB yield and past-prime acreage which is also due for replanting soon, and this would affect production and bottom line. — UOBKayHian, Nov 21
This article appeared in The Edge Financial Daily, November 22, 2011.
