IOI Corporation Bhd (Aug 25, RM5.16)

Maintain hold at RM5.25 with revised target price RM5.89 (from RM5.54): IOI’s full year adjusted net profit for FY2010 came in some 10% above our estimates but 8.4% below street numbers. Revenue declined 14% as the group saw a lower CPO average selling price (ASP) of RM2,372 per mt for the year (RM2,831 per mt in 2009). CPO ASP was in line with our RM2,400 expectation for FY2010. The group’s earnings still showed growth as its downstream and property business (from sales in Singapore) had a better year.

IOI, unlike peers, does not have any newly maturing estates like KLK or Genting Plantations. For FY2010, IOI saw a 6.1% decline in FFB production as FFB yield/ha dropped from 26mt/ha to 24.4mt/ha. Mature hectarage also saw a shrinking of 0.7% at end-2010. We understand the group to be actively planting in Indonesia (est 15,000 to 20,000 ha pa) but this will not likely be contributing to earnings until post 2013. As such, IOI is likely to see rather flattish FFB production in the coming few years.

CPO prices look to be trading with a rather wide range of RM2,300 to RM2,800 per mt and we view this volatility to continue into IOI’s FY2011. This is in tandem with our neutral view on the sector. We don’t see the potential for any supply or demand shocks in the coming 12 months as stock levels in Malaysia are not threateningly low and demand has not been supernormal. On exogenous factors, the soybean market looks likely to be flush with a record crop from North America by year-end and this will keep soy prices bearish into 2011. Given the wide trading range of CPO prices, we view a CPO ASP of RM2,500 per mt as more realistic than RM2,400 per mt. Changes to earnings include (i) raising CPO ASP from RM2,400 to RM2,500, (ii) lowering FFB yield to 26mt/ha from 27mt/ha, and (iii) increasing manufacturing margins from 4% to 5%.

The net effect of our adjustments turns out to be positive and raises FY2011 EPS by 6.6%. As such, our target price increases from RM5.54 to RM5.89 (pegging 22 times historical average PER) and we maintain our hold call on IOI at this juncture. - ECM Libra Investment Research