IOI CORPORATION HOLD. Dividends are sustainable for now. Company report. (Maintained) PLANTATION

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1 PLANTATION IOI CORPORATION (IOI MK,IOIC.KL) 26 July 2018 Company report Gan Huey Ling, CFA Dividends are sustainable for now Rationale for report: Company Update HOLD (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM4.57 RM4.30 RM4.81/RM4.206 YE to Jun FY17 FY18F FY19F FY20F Revenue (RMmil) 14, , , ,526.5 Net Profit (RMmil) , , ,179.8 EPS (sen) EPS growth (%) (0.2) 9.5 Consensus net (RMmil) 1, , ,247.0 DPS (sen) PE (x) EV/EBITDA (x) Div Yield (%) ROE (%) Stock and Financial Data Shares Outstanding (million) 6,286.3 Market Cap (RM mil) 28,728.4 Book value (RM/share) 1.19 P/BV (x) 3.8 ROE (%) 9.8 Net Gearing (%) 75.5 (as at end-june 2017) Major Shareholders Tan Sri Lee Shin Cheng (48.4%) EPF (9.3%) Free Float (%) 51.6 Avg Daily Value (RMmil) 19.4 Price performance 3mth 6mth 12mth Absolute (%) Relative (%) Investment Highlights Maintain HOLD on IOI Corporation with a lower fair value of RM4.30/share (vs. RM4.60/share previously). Our fair value is based on an FY19F PE of 25x. We have reduced IOI s FY19F net profit by 6.5% to account for a weaker plantation EBIT margin of 48% vs. 50% originally. We believe that rising production costs coupled with falling CPO prices would erode IOI s EBIT margin in FY19F. Although IOI is flushed with cash after the disposal of Loders Croklaan, we think that it would be challenging for IOI to acquire palm oil assets. The issue is pricing. Selling prices of planted landbank in Malaysia and Indonesia have remained high even though CPO prices have been falling. IOI s last upstream expansion was the RM1bil acquisition of Unico-Desa Plantations in year IOI s gross cash and cash equivalents stood at RM3.7bil as at end-march As for downstream expansion, we do not think this will materialise anytime soon. Based on IOI s past track record, the group is conservative in expanding in oleochemicals. In the past three years, IOI has only acquired Cremer Oleo GmbH s operations in Germany in 2015, which cost about 89.4mil. Hence, the other option is for IOI to return cash to its shareholders in the form of higher dividends. Based on IOI s gross cash reserves of RM3.7bil, we think that IOI would be able to sustain a gross DPS of 16 sen each in the coming two years. These would only eat up 54% of the RM3.7bil reserves without accounting for any yearly increase in cash flows. The gross DPS of 16 sen in FY19F is the same as FY18E. In 9MFY18, IOI paid a gross DPS of 16 sen, which included the special dividend of 11 sen. The special dividend was paid following the disposal of Loders Croklaan, which was completed in March Recall that IOI sold Loders Croklaan for 275.5mil and US$595mil cash, to Bunge. Operationally, we have assumed that IOI s FFB production would grow by a slower 4% in FY19F vs. 11% recorded in FY18. Production cost (cash cost) may rise from RM1,500/tonne in FY18E to RM1,550/tonne in Malaysia in FY19F dragged by higher wages, transportation and fertiliser costs. We have also assumed an average CPO price of RM2,450/tonne for IOI in FY19F compared with RM2,500/tonne in FY18E.

2 4,500,000 EXHIBIT 1: FFB PRODUCTION (TONNES) AND FFB YIELDS (TONNES/HA) ,000,000 3,500,000 tonnes FFB yield ,000, ,500,000 2,000, ,500, ,000, , FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19F FY20F 0.0 Source: Company, AmInvestment Bank MAINTAIN HOLD WITH LOWER FAIR VALUE OF RM4.30/SHARE Maintain HOLD on IOI Corporation with a lower fair value of RM4.30/share. We have reduced IOI s FY19F net profit by 6.5% to account for a weaker plantation EBIT margin of 48% vs. 50% previously. Our fair value for IOI is based on an FY19F PE of 25x. In the past year, IOI s PE ranged from a low of 17.6x to a high of 38.2x. Average PE was 27.9x. After our earnings revision, IOI s net profit is expected to be relatively flat in FY19F. This is mainly due to a lower CPO price assumption of RM2,450/tonne in FY19F vs. RM2,500/tonne estimated in FY18E. We have forecast a gross DPS of 16 sen for FY19F, which is the same as FY18E. The gross DPS of 16 sen translates into a yield of 3.5% for FY19F. We believe that IOI would be able to sustain its dividend payments due to its high cash reserves. IOI s balance sheet is clean. The group s net gearing ratio has fallen as cash from the disposal of Loders Croklaan boosted reserves. Part of the disposal proceeds were also used to repaid borrowings. IOI s net gearing dropped from 69% as at end- December 2017 to 26.1% as at end-march UPDATES FFB production growth to be slower in FY19F We have assumed an FFB production growth of 4% in FY19F vs. 11% recorded in FY18E. The improvement in IOI s FFB output in FY19F is expected to be driven mainly by an increase in mature areas of 6,800ha. FFB yields are envisaged to be flat in FY19F. We believe that after a productive FY18E, IOI s FFB yield would take a breather in FY19F (see Exhibit 1). As such, we have assumed IOI s FFB yield to be stagnant at 23 tonnes/ha in FY19F. IOI s FFB come mainly from the group s oil palm estates in Malaysia as the mature areas in Indonesia are still small. We estimate that Indonesia only accounts for 2% of group FFB output. Currently, IOI has mature areas of 10,000ha in Indonesia. These comprise 6.5% of total mature areas of 153,000ha. Malaysia accounts for the balance 93.5% of IOI s mature areas. On a group level, average age of IOI s oil palm trees is estimated to be 12 to 13 years old. Average age of the group s oil palm trees in Malaysia is 14 years while in Indonesia, average age of the trees is four to five years. Replanting instead of new plantings The aim is to plant about 8,000ha of oil palm in Indonesia in the coming two financial years. IOI has already received approvals from the RSPO (Roundtable for Sustainable Palm Oil) to carry out the new plantings. AmInvestment Bank Bhd 2

3 However, IOI may not carry out the new plantings if it does not have enough resources. IOI has not carried out sizeable new plantings of oil palm in Indonesia since FY15. We believe that IOI s temporary suspension from the RSPO of four months in 2016 resulted in the group being cautious in its plantation activities in Indonesia. IOI has plantable landbank of 9,000ha left in Indonesia. Instead of new plantings, we think that IOI will be focusing on replanting. The group is planning to replant about 7,000ha of ageing oil palm trees in Sabah in FY19F. About 31% of IOI s oil palm trees are more than 16 years old. IOI has already completed its replanting programme in Peninsular Malaysia. Replanting cost until maturity is estimated to be RM15,000/ha to RM18,000/ha. Production cost per tonne to rise in Malaysia in FY19F We believe that IOI s production cost (cash cost) in Malaysia will increase from RM1,500/tonne in FY18E to RM1,550/tonne in FY19F. This is due to higher costs of fertiliser, wages and transportation. If the minimum wage in Malaysia was raised from RM1,000/month to RM1,250/month, IOI s production cost per tonne would increase by 3%. If the minimum wage was raised to RM1,500/month, then IOI s production cost per tonne would rise by 7%. Currently, minimum wages are RM1,000/month in Peninsular Malaysia and RM920/month in Sabah and Sarawak. Industry players have indicated that fertiliser costs would go up by 8% to 10% in 2018F. This is because of strong demand for potash from countries like Brazil and a shortage in potash supply due to the closure of a few mines in Canada. Net gearing is now at a comfortable level IOI s net gearing is now comfortably below 50% after hovering at 75% each in FY16 and FY17. We expect IOI s net gearing level to remain low in the future unless the group increases borrowings for a major acquisition. Due to the high level of cash reserves, we believe that IOI would be able to pay sustain its dividend payments in FY19F and FY20F. Hence, we have forecast a gross DPS of 16 sen for FY19F, which is the same as FY18E. The gross DPS of 16 sen translates into a decent dividend yield of 3.5% for FY19F. IOI s gross cash and cash equivalents surged from RM1.5bil as at end-june 2017 to RM3.7bil as at end- March This was mainly due to the proceeds from the disposal of Loders Croklaan to Bunge. Loders Croklaan was sold to Bunge for 275.5mil and US$595mil cash in March AmInvestment Bank Bhd 3

4 TABLE 1 : FINANCIAL DATA Income Statement (RMmil, YE 30 Jun) F 2019F 2020F Revenue 11, , , , ,526.5 EBITDA 1, , , , ,248.7 Depreciation (460.6) (479.7) (501.6) (546.6) (565.5) Operating income (EBIT) 1, , , , ,683.2 Other income & associates Net interest (165.3) (174.2) (175.2) (163.9) (154.4) Exceptional items Pretax profit , , , ,737.6 Taxation (319.5) (331.5) (477.0) (476.2) (521.3) Minorities/pref dividends (16.6) (22.9) (33.4) (33.3) (36.5) Net profit , , ,179.8 Balance Sheet (RMmil, YE 30 Jun) F 2019F 2020F Fixed assets 9, , , , ,973.1 Intangible assets Other long-term assets 1, , , , ,899.2 Total non-current assets 11, , , , ,446.4 Cash & equivalent 2, , , , ,530.9 Stock 2, , , , ,765.0 Trade debtors , , , ,148.5 Other current assets Total current assets 5, , , , ,756.0 Trade creditors Short-term borrowings 2, , , , ,203.2 Other current liabilities Total current liabilities 3, , , , ,526.4 Long-term borrowings 4, , , , ,111.2 Other long-term liabilities 1, , , , ,423.0 Total long-term liabilities 6, , , , ,534.2 Shareholders' funds 7, , , , ,777.2 Minority interests BV/share (RM) Cash Flow (RMmil, YE 30 Jun) F 2019F 2020F Pretax profit , , , ,737.6 Depreciation Net change in working capital (183.5) (676.5) (498.0) (534.3) (582.9) Others (336.9) (323.7) Cash flow from operations 1, , , , ,396.6 Capital expenditure (458.6) (497.9) (450.0) (450.0) (450.0) Net investments & sale of fixed assets (6.7) Others (350.4) Cash flow from investing (803.2) (410.5) (456.7) (376.3) (368.9) Debt raised/(repaid) (383.8) (11.2) (9.8) (8.4) Equity raised/(repaid) (136.2) (19.7) Dividends paid (511.5) (603.8) (1,005.8) (1,005.8) (1,005.8) Others (217.4) (301.1) Cash flow from financing (678.8) (1,308.4) (1,017.0) (1,015.6) (1,014.2) Net cash flow (431.2) (129.3) 13.4 Net cash/(debt) b/f 1, , , , ,517.4 Cash transferred to disposal group for sale Forex (0.3) Net cash/(debt) c/f 1, , , , ,530.9 Key Ratios (YE 30 Jun) F 2019F 2020F Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rate (%) Net dividend payout (%) Trade debtors turnover (days) Stock turnover (days) Source: Company, AmInvestment Bank estimates AmInvestment Bank Bhd 4

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