The Star Online (28/05/2020) - KUALA LUMPUR: On the back of missed earnings expectations, Kenanga research anticipates more weakness ahead for IOI Corp Bhd as lower crude palm oil (CPO) prices and downstream margins pressure follow it into the final quarter of its financial year.

"Reduce FY20-21E earnings by 11-10% on lower revised FFB output, implying FY20E/FY21E growth of -9%/+5% and lower CY20-21 CPO price forecast of RM2,300-2,400/MT," it said.

Kenanga downgraded the stock to "market perform" although its target price was raised to RM4.25 from RM4.10 previously based on a rolled over FY21 price-earnings forecast of 28x.

"In our view, the sector lacks further catalysts to propel CPO prices higher.

"Demand resumption from India is unlikely to outstrip rising production, which should be reflected in MPOB data in the coming months, capping CPO price upside," it said.

According to the research house, there could be slight weakness in 4QFY20 upstream earnings due to lower CPO prices although higher fresh fruit bunch (FFB) output should partially offset the negative impact.

Meanwhile, the lower average selling price from the decline in CPO prices should also impact downstream margins.

For the sector overall, the research house said the risk of CPO price pressure entering into peak production season remains although risks associated with demand from failure to implement biodiesel mandates have been addressed.

For the recent third quarter, IOI's core net profit was 8% higher year-on-year to RM220.5mil, bringing its core earnings over nine months to RM656.7mil.

The result over three quarters missed Kenanga's expectation at 69% of its full-year estimate but met consensus forecast at 79% of its full-year estimate.

Read more at https://www.thestar.com.my/business/business-news/2020/05/28/earnings-weakness-for-ioi-on-lower-cpo-prices-asp