IOI Corporation Bhd
(Jan 11, RM5.21)
Hold at RM5.20, target price RM5.21: As October was an astounding month for production across the industry, IOI saw yields for the quarter improve by 18.8%. Correspondingly, fresh fruit bunches production scaled ahead by 18.1%. Going into the third quarter (3Q) of FY10, however, we expect softer yields and hence profits due to the seasonal production downcycle.

This will be despite that CPO prices have been stronger so far in 3Q10. MPOB (Malaysian Palm Oil Board) statistics just for January have indicated that production declined some 11% and this should be reflected in the group’s numbers.

Annualised and adjusted for RM130 million in forex translation gain, IOI’s six-month FY10 net profits came in 11% above our expectations but 8.6% below consensus estimates. For the six-month period, IOI achieved a CPO average selling price of RM2,258. This is slightly lower than the MPOB average of RM2,307 for the quarter.

Looking at segments, the plantations segment certainly pulled the group through this quarter. Manufacturing margins were softer quarter-on-quarter (q-o-q) but have certainly seen a recovery from last year when the group was plagued with customer defaults and forex losses. Also, the group notes that the property segment continued to see good numbers from increased sales in the Klang Valley. We continue to see stagnant growth into FY10 as the group has minimal major maturities coming onstream. Planting continues in Indonesia and will likely to start contributing in two to three years only.

Expansion on their downstream side will likely come through in terms of earnings towards the end of FY10 into FY11. Recall that the group was spending around RM400 million to boost downstream operations in The Netherlands.

There are no changes to our estimates at this juncture. With 3Q results expected to be softer, our full-year estimates look on track to be met. To note, the group declared a two sen dividend for the period.

We view that should the stock price decline further, there will be some bargain-hunting opportunities. At RM5.21 though (22 times PE pegging FY10 estimates), we see IOI as fully valued. — ECM Libra, Jan 11