IOI Corporation

A Good Quarter But Not Its Best Yet

IOI Corp’s y-t-d earnings were generally in line. However, the best is yet to come as the June quarter will likely see earnings surge on higher realised CPO price and higher FFB production. Our recently raised earnings forecast is under review again given the stronger than expected manufacturing earnings. Though we have stripped off currency translation gains from core earnings, such gains reflect the financial savvy and conservatism of the company in using USD borrowings to hedge its overseas assets. IOI is still one of the best run companies around and will likely be the first mover again when sector sentiment improves. Maintain Buy.

Results in line. IOI Corp’s annualized 9mthFY08 core net profit were within our expectation as well as consensus estimate. Reported net profit of RM1,634.3m appears to be ahead of market expectation but after stripping out currency translation gains from US$ borrowings and disposal of non-core assets amounting to RM243.5m, IOI’s results were generally in line. On q-o-q basis, core earnings were up by 8.0%. Plantation earnings were 7.5% lower as the higher CPO prices were not enough to offset the 23% drop in FFB output. Lower plantation earnings were more than offset by stronger resource-based manufacturing as well as property segment earnings. Manufacturing segment recorded RM457.4m 9 months EBIT, making up 95% of our full year forecast of RM479.7m. This is likely due to stronger than expected contribution from Pan Century refinery & oleochemical complex acquired last year.

Average CPO price. IOI realised average CPO price of RM2,705/t for the 9 months period against RM2,923/t we have imputed into our earnings model, taking into consideration Sabah discount and sales tax. We estimate that for the March quarter alone, IOI realised CPO selling price of RM3,050/t compared to MPOB average for West Malaysia of RM3,472 for March quarter and RM2,901 for the December quarter. We deem the realised price as fair considering its rolling forward sale.

A stronger 4Q ahead. We believe IOI will report a sequentially stronger June quarter as its March quarter has not fully reflected the record CPO price in the March quarter due to its forward sale. Moreover, the June quarter production is seasonally higher. We have forecasted RM2.2bn plantation EBIT for the full year against RM1.3bn achieved so far. While maintaining our plantation segment forecast, we are reviewing the manufacturing division earnings forecast given its stellar performance.

From OSK Research 16 May 2008