28.06.2019 (The Edge Markets MY) - IOI Corp Bhd

(June 27, RM4.29)

Maintain hold with an unchanged target price of RM4.42: IOI Corp Bhd has been actively looking for plantation estates for acquisition, after selling its 70% equity interest in Loders Croklaan Group BV to Koninklijke Bunge BV (KBBV).

About RM1 billion of the proceeds from the disposal has been earmarked for investment opportunities. However, there could potentially be a delay in any acquisitions, partly due to securing a suitable location and size, while the high price tags of recent acquisition transactions by other plantation companies have been a deterrent.

Crude palm oil (CPO) prices in the nine-month period of financial year 2019 (9MFY19) were under pressure partly due to ample supply of other edible oils in the market, weak market sentiment as well as ongoing US-China trade tensions. We expect global palm oil inventory to gradually fall with higher exports and higher consumption of palm oil products. Stronger exports and consumption will likely be supported by the energy market and food industries. We maintain our CPO average selling price assumptions for IOI Corp at RM2,050-2,400 per tonne for FY19-21E.

The drop in IOI Corp’s 9MFY19 earnings was partially cushioned by higher contribution from its resource-based manufacturing division. We expect IOI Corp’s resource-based manufacturing division to continue to perform well given the strong demand for its oleochemical and refining products.

We have made no changes to our earnings forecasts. We expect FY19E profit to be affected by lower margins due to weak CPO prices. We think earnings could potentially improve in FY20-21E, on the back of improving CPO production and prices. — Affin Hwang Capital, June 27