Maintain HOLD on IOI Corporation with a higher fair value of RM4.70/share vs. RM4.50/share

STOCK FOCUS OF THE DAY

IOI Corporation : RSPO lifts suspension  HOLD

Maintain HOLD on IOI Corporation with a higher fair value of RM4.70/share vs. RM4.50/share previously. Our fair value implies a FY17F PE of 25x. We have raised IOI's FY17F net profit by 4.8% to account for the return of RSPO customers. Due to the upward revision in our earnings forecast for IOI, the group's net profit is now estimated to grow by 7.5% in FY17F. We have assumed that IOI's FFB production would improve by 5.0% in FY17F. Average CPO price is forecast at RM2,500/tonne for FY17F for now.  RSPO has lifted IOI's suspension with effect from 8 August 2016 onwards. This is positive for IOI's Loders Croklaan as the cancellation of the suspension would bring some customers back to the stable. Specialty fats is estimated to account for 10% to 13% of IOI's annual EBIT. IOI was suspended for nearly six months. When IOI was suspended in mid-March 2016, its share price was hovering at RM4.97. CPO price (MDEX price) was RM2,615/tonne at that time. Price of CPO for delivery in September is RM2,434/tonne currently. Since the suspension, many customers such as Kellogg, Mars and Unilever have cancelled their new orders with the group. In July, Bunge and Cargill also announced that they would halt signing new contracts with IOI.  

Previously, we estimated that IOI's FY17F net profit would fall by 10% due to the negative impact of the RSPO suspension. About 5% to 7% of IOI's profits would have been hit by the cancellation of orders while the balance 3% to 5% would have been affected by the loss of RSPO premium.  We did not raise IOI's FY17F net profit by 10% as we believe that it would take for customers to reinstate their new contracts with IOI. Some of these customers would have signed new contracts with other specialty fats manufacturers such as AK, Fuji Oil and Wilmar International. Suppliers of RSPO-certified CPO include planters such as Sime Darby and KL Kepong.

Others :

Sapurakencana Petroleum : Gaining from Swiber’s financial predicament?           HOLD

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