IOI Corp IOI MK Sector: Plantation

Transcription

1 Waiting IOI has made its submissions and is awaiting an official reply from the RSPO Complaint Panel on its application to lift the certification suspension. We believe the decline in market capitalisation since March seems disproportionate to the financial impact, and a share price rebound can be expected if the outcome is positive. IOI is aiming for RSPO Next. We cut our FY16-18E core net profit forecasts by 1%-12% following lower-than-expected FY16 FFB production due to the last El Niño. Maintain HOLD with a lower TP of RM4.15. Necessary submissions made, waiting for RSPO CP to reply IOI submitted a status update of its Quarterly Progress Report on 27 June and is now awaiting an official reply from the RSPO Complaint Panel on its application to lift the certification suspension. Early lifting will limit financial impact and reputational damage The decline in market capitalisation since March seems disproportionate to the potential financial impact. A positive outcome on its application hence is expected to result in a share price rebound, in our view. Aiming for RSPO Next To further enhance the group s sustainability commitments and credibility, IOI is aiming for RSPO Next, a voluntary programme to exceed current RSPO P&C and which provides for third party audits of actions. Production rebound in 4QFY16 not as strong as expected The rebound in FFB production in 4QFY16 was lower-than-expected while CPO ASP is around 8% higher. Due to the lower-than-expected FY16 production, we now project a higher growth of 1%-11% in FY17E. Cutting forecasts and TP, maintain HOLD rating We cut our FY16E-18E core net profit forecasts by 11.7%, 2.8% and 1.% and our TP to RM4.15 from RM4.24. We expect the FY16E headline net profit to be cut by net foreign currency translation and derivatives losses as the Ringgit had weakened against the US$ in 4QFY16. Maintain HOLD. Key risks Key downside risks include prolonged RSPO certification suspension and sharp decline in CPO price while key upside risks include a sharp rise in vegetable demand and change in policies leading to higher CPO price. Earnings & Valuation Summary FYE 3 Jun E 217E 218E Revenue (RMm) 11, , , , ,448. EBITDA (RMm) 2, , ,889. 2,11.1 Pretax profit (RMm) 1, , ,86. 1,919.3 Net profit (RMm) 1, , ,461.2 EPS (sen) PER (x) Core net profit (RMm) 1, , , ,461.2 Core EPS (sen) Core EPS growth (%) (2.) (26.9) Core PER (x) Net DPS (sen) Dividend Yield (%) EV/EBITDA (x) Company Update IOI Corp IOI MK Sector: Plantation 21 July 216 HOLD (maintain) Downside: 3.5% Price Target: RM4.15 Previous Target: RM4.24 (RM) Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Price Performance 1M 3M 12M Absolute -1.1% -3.6% -.2% Rel to KLCI -2.4%.% +4.4% Stock Data Issued shares (m) 6,36.4 Mkt cap (RMm)/(US$m) 27,35/6,83 Avg daily vol - 6mth (m) wk range (RM) Est free float 55% BV per share (RM).83 P/BV (x) 5.2 Net cash/ (debt) (RMm) (1Q16) (5,261) ROE (FY16E) 21.3% Derivatives No Shariah Compliant Yes Key Shareholders Progressive Holdings Sdn Bhd 47.1% EPF Board 6.4% Skim ASB 5.1% Source: Affin Hwang, Bloomberg Ong Keng Wee (63) kengwee.ong@affinhwang.com Chg in EPS (%) (11.7) (2.8) (1.) Affin/Consensus (x) , Affin Hwang forecasts, Bloomberg Page 1 of 6

2 Waiting Necessary submissions made, waiting for RSPO CP to reply To recap, IOI submitted a completed Action Plan, board-endorsed Quarterly Progress Report and Group Sustainable Resource Allocations and Policy Initiatives, and Peer Review assessments conducted by Daemeter to the RSPO Complaint Panel (CP) in May 216. Daemeter is a HCV (High Conservation Value) assessor approved by both RSPO and Aidenvironment, a NGO complainant. On 27 June 216, IOI submitted to the RSPO CP a status update of its Quarterly Progress Report, specifically pertaining to the land use change analysis using satellite images and various reports. IOI believes the RSPO CP deliberated on its application to lift the certification suspension on 29 June 216, but has yet to receive any official replay or substantial information. The group stands ready to do more to address any requirements from RSPO for the early lifting of its certification suspension. Early lifting should limit financial impact and reputational damage The RSPO certification suspension has caused serious reputational damage to the group even though CSPO sales account for just around 4% of group EBIT. The almost RM4.bn decline in market capitalisation since March seems disproportionate to the potential financial impact, in our view. A positive outcome in its application to lift the certification suspension hence is expected to see the share price staging a rebound. Due to the availability of inventories, the EBIT impact of the certification suspension in FY16 is not expected to exceed RM2m. EBIT impact in FY17 is estimated at RM12m a month until CSPO sales resume. SPOP and SIP to be published, aiming for RSPO Next To further enhance the group s sustainability commitments, IOI is also endorsing and publishing its Group Sustainability Palm Oil Policy (SPOP) and Sustainability Implementation Plan (SIP) in the next two weeks, and formalising a public Grievance Mechanism by September. The group is also aiming for RSPO Next, a voluntary programme for RSPO member companies aiming to exceed current requirements and guidance of the RSPO Principles and Criteria (P&C). Key components include No Deforestation, No Fire, No Planting on Peat, Reduction of GHGs, Respect for Human Rights and Transparency, and are applicable at an organisation wide level. RSPO Next provides for on the ground third party audits of actions and thereby enhances credibility. 4QFY16 CPO ASP and FFB production rose by 8.2% and 36.5% qoq Due to concerns about the negative impact of El Niño on production, CPO average selling prices were firmer both qoq and yoy in 4QFY16. Locallydelivered spot prices averaged RM2,65/MT in Peninsular Malaysia, up 8.2% from RM2,46/MT in 3QFY16 and 18.5% from 4QFY15. Own FFB production in June amounted to 282,928 MT, raising total FFB production in 4QFY16 to 717,485 MT, which is an increase of 36.5% over 3QFY16. Production rebound in 4QFY16 not as strong as expected The 36.5% qoq rebound in FFB production is however not as strong as management had expected. Management was earlier hopeful of a strong recovery in 4QFY16 to limit FY16 FFB production decline to 5%-6%. Actual FY16 FFB production of 3.15m MT in FY16 however declined 11.2% from the 3.54m MT recorded in FY15. Page 2 of 6

3 Fig 1: FFB and oil yields in FY15 and 1HFY16 (mmt) FFB production qoq change 1.2 5% Fig 2: Net translation and derivative gains/(losses) (RMm) Net translation gain Gain on derivatives RM change 6 15% QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 4% 3% 2% 1% % -1% -2% -3% -4% -5% 4 2 (2) (4) (6) (8) (1,) 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1% 5% % -5% -1% -15% -2%, Bursa Malaysia, Bloomberg Stronger production rebound expected in FY17 Following the sharper-than-expected decline in FFB production in FY16, management now expects a stronger 1%-11% rebound (previously 6%- 8%) in production to around 3.5m MT in FY17E. Stronger recovery in yields is projected in Sabah, which was more significantly affected by the previous El Niño event. Young planted areas of approximately 21, ha in Indonesia are also expected contribute to the production rebound. Cutting forecasts and TP, maintain HOLD rating Taking into account the lower-than expected production but higher average selling price in 4QFY16, we cut our FY16E core net profit forecasts by 11.7% to RM1,114.6m. We expect the FY16E headline net profit to be lower due to net foreign currency translation and derivative losses as the Ringgit had weakened from around RM3.88 in 3QFY16 to RM3.99 in 4QFY16 against the US$. We also cut FY17E and FY18E core net profit forecasts by 2.8% and 1.% based on lower FFB production estimates but unchanged CPO ASP assumption of RM2,4/MT. Our target price is based on an unchanged target PE of 19x and revised CY17E EPS of 21.8 sen is cut from RM4.24 to RM4.15. Maintain HOLD. Key risks Key downside risks include (i) prolonged RSPO certification suspension; (ii) weaker economic growth; (iii) higher-than-expected vegetable oil production; (iv) sharp decline in CPO price; and (v) spike in cost of production. Key upside risks include early lifting of RSPO certification suspension, sharp rise in vegetable demand and change in policies leading to higher CPO price. Page 3 of 6

4 Focus Charts Fig 3: Trend of mature, immature and total planted areas Fig 4: Planted areas by region as at 3 June 215 (ha) (ha) Mature Immature Total planted 18, 18, 16, 16, 14, 14, 12, 12, 1, 1, 8, 8, 6, 6, 4, 4, 2, 2, FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 East Msia Pen Msia Indonesia Group. Affin Hwang estimates Fig 5: Age profile of palms as at 31 March 216 Fig 6: FFB yield and OER (MT/ha) 3. FFB yield OER (%) 22. Past Prime 23.% Due 2.% Prime 48.% Immature 18.% Young 9.% 18. FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY Fig 7: Trend of FFB production (mmt) Fig 8: Plantation and manufacturing operating profits (RMm) 1, FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY15 9MFY16, Affin Hwang estimates Page 4 of 6

5 IOI CORP FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 3 June (RMm) E 217E 217E FYE 3 June (RMm) E 217E 217E Revenue 11, , , , ,448. Grow th Operating expenses (9,73.7) (1,941.3) (11,646.7) (11,973.4) (12,436.9) Revenue (%) (2.4) (2.4) EBITDA 2, , ,889. 2,11.1 EBITDA (%) 29.3 (68.8) Depreciation (85.8) (92.7) (1.1) (18.1) (116.7) Core net profit (%) (19.8) (26.4) EBIT 2, , ,781. 1,894.3 Net int income/(expense) (234.6) (195.) (154.) (142.) (13.) Profitability Associates' contribution EBITDA margin (%) Pretax profit 1, , ,86. 1,919.3 PBT margin (%) Tax (48.4) (284.6) (341.6) (412.3) (438.2) Net profit margin (%) Minority interest (16.7) (4.3) (4.) (2.) (2.) Effective tax rate (%) Net profit 1, , ,461.2 ROA (%) Core ROE (%) Balance Sheet Statement ROCE (%) FYE 3 June (RMm) E 217E 217E Dividend payout ratio (%) Fixed assets 6,44.1 6, ,85. 6,9. 7,. Other long term assets 1,55.5 1, , , ,664.1 Liquidity Total non-current assets 7, ,37.8 8, , ,664.1 Current ratio (x) Op. cash flow (RMm) 1, , , , ,554.9 Cash and equivalents 4,68.4 1, , , ,67.3 Free cashflow (RMm) 1, ,6.9 1, ,463.5 Stocks 2, ,83.1 2, , ,483.1 FCF/share (sen) Debtors 1,62.7 1,62.4 1,2. 1,25. 1,25. Other current assets Asset managenment Total current assets 7,386. 5, , , ,43.4 Debtors turnover (days) Asset held for sale/distr Stock turnover (days) Creditors turnover (days) Creditors ,15. 1,1. 1,1. Short term borrow ings 2, ,2. 2,25. 2,3. Capital structure Other current liabilities Net gearing (%) Total current liabilities 3, , ,545. 3,545. 3,595. Interest cover (x) Liabilities of disposal grp Long term borrow ings 5,69.2 5, ,3. 5,2. 5,1. Quarterly Profit & Loss Other long term liabilities FYE 3 June (RMm) 3Q15 4Q15 1Q16 2Q16 3Q16 Total long term liabilities 5,61.7 6,32.2 5,8. 5,7. 5,6. Revenue 2, ,942. 3,86.7 2, ,866. Shareholders' funds 6,36.8 5,59.1 5, , ,683.2 Operating expenses (2,34.5) (2,53.6) (2,75.4) (2,163.4) (2,293.1) Minority interests EBITDA Depreciation (59.6) (56.1) (49.) (84.5) (62.1) Cash Flow Statement EBIT (52.8) 23.5 (636.5) FYE 3 June (RMm) E 217E 217E Net int income/(expense) (57.5) (54.3) (44.8) (41.5) (4.) EBIT 2, , ,781. 1,894.3 Associates' contribution Depreciation & amortisation Exceptional Items (146.) Working capital changes (27.8) (6.5) (15.) (5.) Pretax profit (19.2) 23.3 (654.) Cash tax paid (491.) (384.6) (341.6) (412.3) (438.2) Tax (8.3) (47.6) (62.4) (139.7) (118.4) Others Minority interest (2.6) (12.) (2.6) Cashflow from operation 1, , , , ,554.9 Net profit (188.) (719.) Capex (329.4) (457.7) (16.3) (42.) (91.4) Core net profit Disposal/(purchases) (4.1) (6.) Others Margins (%) Cash flow from investing (33.3) (93.3) 25. (24.4) EBITDA Debt raised/(repaid) (18.1) (4,336.1) 1,267.5 (7.) (7.) PBT (4.) 6.9 (21.2) Equity raised/(repaid)..... Net profit (6.8) 5.4 (23.3) Net interest income/(exp) (234.6) (268.2) (154.) (142.) (13.) Dividends paid (1,51.1) (1,49.3) (775.1) (775.1) (775.1) Others (5.5) 2,397.5 (211.) (222.) (233.) Cash flow from financing (1,399.3) (3,256.1) (1,29.1) (1,28.1) Free Cash Flow 1, ,6.9 1, ,463.5, Affin Hwang forecasts Page 5 of 6

6 Equity Rating Structure and Definitions BUY Total return is expected to exceed +1% over a 12-month period HOLD Total return is expected to be between -5% and +1% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 545 Kuala Lumpur. affin.research@affinhwang.com Tel : Fax : Page 6 of 6