AmWatch - IOI Corporation : Dragged by weak manufacturing earnings HOLD, 18 Nov 2014

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IOI Corporation : Dragged by weak manufacturing earnings         HOLD

Maintain HOLD on IOI Corporation with an unchanged fair value of RM5.15/share. Our fair value of RM5.15/share is roughly based on an FY15F PE of 25x. On an annualised basis, IOI’s core 1QFY15 results were below consensus estimates and our earnings forecast mainly due to a 50.2% YoY fall in manufacturing earnings. In spite of this, we are keeping our earnings estimates for IOI for now.

IOI’s plantation profits rose 12.4% YoY to RM281mil in 1QFY15 on the back of higher palm oil production, which compensated for lower CPO pricel. FFB production grew by 10.4% YoY in 1QFY15. CPO production climbed by a larger 16.2% due to an increase in FFB purchases. Average CPO price realised edged down by 3.8% from RM2,347/tonne in 1QFY14 to RM2,258/tonne in 1QFY15. According to the results announcement, IOI’s manufacturing division suffered from weak margins and lower sales volume of oleochemical and refining products. Manufacturing profit margin declined from 6.9% in 1QFY14 to 3.7% in 1QFY15. On a quarterly basis, operating profit margin was steady at 3.7% in 1QFY15.  

We reckon that the manufacturing division was affected by negative refining margins. We believe that refining margins were about RM10/tonne to RM30/tonne in the red.About 20% of the division’s profits come from the refining segment. The balance 80% of the unit’s earnings is accounted equally by the oleochemical and specialty fats segments. IOI’s specialty fats plant in Xiamen, China is expected to be commissioned in early-2016. IOI is expected to repay about RM2bil of its RM7.7bil borrowings by 1Q2015. Part of the borrowings is in respect of the RM1.5bil or US$476.4mil guaranteed notes that will be due for redemption on 16 March 2015. The reduction of borrowings would help IOI comply with Syariah guidelines.

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