IOI Corporation. Company Guide

Transcription

1 Version 9 Bloomberg: IOI MK Reuters: IOIB.KL Refer to important disclosures at the end of this report AllianceDBS Research, Malaysia Equity 13 Mar 2018 HOLD Last Traded Price ( 12 Mar 2018): RM4.85 (KLCI : 1,861.22) Price Target 12-mth: RM4.70 (-3% downside) (Prev RM4.70) Shariah Compliant: Yes Analyst Marvin KHOR marvinkhor@alliancedbs.com What s New Completed sale of Loders in March 2018, special dividend of 11.5 sen announced Expect one-off disposal gain to lift FY18F earnings, though core earnings are seen to ease into FY19F Greater sensitivity to CPO price movements, low gearing to facilitate M&A opportunities Maintain HOLD, RM4.70 TP Price Relative Shifting gear to upstream Room to manoeuvre after downstream divestment. IOI completed its sale of 70% in its previously wholly-owned Loders Croklaan Group in early March 2018, securing a sizeable oneoff gain in FY18F and allocating 11.5 sen per share in special dividends to shareholders. The move strategically reduces its exposure to the downstream segment, which had endured volatile margins; while increasing its earnings sensitivity to CPO price movements which will be beneficial in the case of a rebound in prices. That said, with the reduced near-term core earnings base, the group will have to seek other growth avenues via acquisition or new investment opportunities, which will be enabled by its significantly lowered gearing position. Before the crystallisation of new expansion plans, we believe the current outlook is well priced at current levels as our updated DCF-based TP remains at RM4.70 (ex-special dividend); maintain HOLD. Where we differ: Imputed sale of Loders units. We have factored in the disposal of the Loders units which results in reduced top line and core earnings for the group from FY18F onwards. Consensus figures have not fully factored in the change, resulting in our forecasts being below the streets. Forecasts and Valuation FY Jun (RM m) 2017A 2018F 2019F 2020F Revenue 14,127 11,994 8,620 8,953 EBITDA 2,094 1,813 1,709 1,783 Pre-tax Profit 1,087 3,493 1,177 1,251 Net Profit 733 3, Net Pft (Pre Ex.) 1, Net Pft Gth (Pre-ex) (%) 31.0 (16.4) (2.2) 5.1 EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 32 (15) (2) 5 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): 231 (11) (10) Consensus EPS (sen): Other Broker Recs: B: 4 S: 10 H: 10 Potential catalysts: CPO price movements and potential M&A. IOI s earnings have greater sensitivity to direct CPO price movements following the majority stake divestment in key downstream units. Additionally, with eased gearing levels, the group may embark on M&A activities to potential expand its plantation assets. Valuation: Our DCF-based TP is RM4.70, which takes into account our CY18/19F CPO price forecasts of RM2,620/2,600 per MT. Key Risks to Our View: A strong recovery in CPO prices (either data, weather or regulatory-driven) may boost the share price higher than our fair value. As IOI is an FBMKLCI component, any changes in its weightings would also make it vulnerable to price swings. At A Glance Issued Capital (m shrs) 6,284 Mkt. Cap (RMm/US$m) 30,477 / 7,806 Major Shareholders (%) Vertical Capacity Sdn Bhd 47.1 Employees Provident Fund 6.8 Free Float (%) m Avg. Daily Val (US$m) 6.1 ICB Industry : Consumer Goods / Plantation Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Refer to important disclosures at the end of this report ed: TH / sa:bc

2 WHAT S NEW Changed earnings profile post divestment Disposal completed. IOI has announced that its share purchase agreement (SPA) with Koninklijke Bunge B.V. has been rendered unconditional with the closing date set at 1 March, thereby finalising IOI s disposal of 70% in its previously wholly owned Loders Croklaan Group B.V. (Loders). Further adjustments will be made to the preliminary disposal consideration (amounting to US$595m plus EUR303.4m; or RM3.787bn thus far) following the closing date; which the group will announce as and when determined. Special dividend of 11.5 sen announced, with ex-date of 16 March. This was below the 13 sen indicative payout from the initial announcement on 13 September 2017, and in line with the lower disposal consideration compared to the initial RM3.94bn estimated. However this is unsurprising, as the ringgit had strengthened against both the dollar and the euro within the time period. As such, the gain on disposal (to be recognised in 3QFY18) will likewise be lower than the indicative RM2.51bn gain. Expect core earnings to ease for two successive FYs, though FY18F will enjoy one-off gain. Factoring in the disposal, we assume the final disposal consideration to be RM3.78bn resulting in a RM2.26bn gain on disposal for IOI in FY18F, inclusive of the revaluation of its remaining 30% associate stake in Loders. However, our core earnings forecasts are reduced by 4%/12%/10% in FY18/19/20F as direct contribution from Loders is removed, offset with reduced net finance costs as borrowings are pared down with RM2bn of proceeds, plus the 30% associate contribution from Loders. Headline earnings are adjusted by +231%/-11%/-10%, netting the changes. As such, we project core profits to decline 16%/2% in FY18/19F, before resuming growth in FY20F. These forecasts also remain anchored on our CPO price assumptions, which are expected to average RM2,620/2,600/2,630/MT in CY18/19/20F. Greater CPO price sensitivity. A notable change for the group is increased weightage of its upstream Plantations on operating profit, which we project to be >80% compared to 60-70% in previous FYs. A sensitivity analysis on our FY19F forecasts show that a 10% change in CPO prices results in a 10% change in core earnings; compared to 8% for our previous (pre-loders disposal) projections. Importantly, the group has also reduced its exposure to the downstream segment which had in the past suffered from volatile margins; while at the same time maintaining it as a potential growth avenue via the associate stake which now benefits from the Bunge group s extensive network and expertise in the global food and agribusiness sector. M&A may be the next kicker. We note that IOI s net gearing position is expected to be reduced to 0.1x by end-fy18f from 0.75x at end-fy17, even after taking into account the special dividend. This is its lowest level since FY10 and presents an opportunity for inorganic expansion via acquisitions. The group s current planted area is c.174,000 ha with c.8,000 ha planned to be added via new planting over the next two years, excluding replanting effects. Purchasing additional brownfield plantations may add to this growth, though pricing to ensure value accretion to the group remains key. After imputing the Loders sale, our DCF-based TP (ex-special dividend) remains unchanged at RM4.70. As such, we believe current prospects are well priced in, barring an uptick in CPO prices or unveiling of new acquisition growth avenues. Maintain HOLD. Page 2

3 CRITICAL DATA POINTS TO WATCH Critical Factors CPO price movements. IOI is a vertically integrated producer, processor and merchandiser of palm oil products. More than 60-70% of EBIT is derived from its Plantations segment, primarily dealing with the sales of CPO and PK. This proportion is set to increase from 2HFY18 onwards, as a notable proportion of its downstream operations are hived off. CPO prices can influence both the ASP and margins of the segment, and we project mild prices of RM2,620/2,600/2,630 per MT for CY18/19/20F. Additionally, CPO prices also affect the earnings performance of its 31.8% associate, SGX-listed Bumitama Agri (BAL). Volume output. IOI had 174,400 ha of oil palm planted area as at end-fy17, of which 149,700 ha (86%) were deemed mature. Netting previous and ongoing replanting activities, we expect an addition 8,200 ha mature areas by FY20F, or a c.2% CAGR. The group targets replanting of c.6,000 ha of older palms per year, which we project will maintain its average tree age of between years. New plantings of up to 8,000 ha are also planned for its plantations in Indonesia. Besides expansion in hectarage, improvements in yields are expected to help drive increase in FFB production, which we project to be 5%/3%/3% in FY18/19/20F to reached c.3.5m MT from 3.15m in FY17. In line with this, CPO output is expected to grow at a 3.8% CAGR. Manufacturing segment margins. IOI had in FY18 divested 70% of its 100% stake in Loders Croklaan Group B.V. which was primarily involved in the production of specialty fats from palm oil derivatives. However, it retains direct exposure to the downstream business via refining and oleochemical operations. Margins are determined by the price of feedstock materials such as CPO and PK, import/export tax regimes in producing and purchasing countries, plus competition among refiners. We expect EBIT contribution to be <20% going forward. Currency translation. IOI s earnings have been significantly impacted by translation effects on its USD-denominated debt of c.us$1.3bn, which made up >80% of group borrowings (excluding trade facilities at Loders). While IOI targets to pare down some of this debt with c.rm2bn of proceeds from the Loders disposal, USD-denominated debt will remain the majority of the group s financing as we estimate the maximum reduction to c.70%. CPO price (RM/MT) Mature palm oil hectarage FFB harvested (k MT) CPO sales volume (k MT) Average MYR/USD Source: Company, AllianceDBS Page 3

4 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Company Guide Appendix 1: IOI's price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jun07 = IOI MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Re-listing of property business Acquisition of Unico Desa Suspension, and subsequent restoration of RSPO certificates 0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Company, Bloomberg L.P., AllianceDBS, DBS Bank IOI's share price vs CPO prices Indexed: Jan08 = 100 IOI MK Spot CPO price (RM/mt) Remarks IOI s share price is principally influenced by the movement of CPO prices, with a long-run correlation coefficient of Source: Company, Bloomberg L.P., AllianceDBS IOI's share price vs margins & currency movements Indexed: Jun12 = 100 IOI MK Q-o-q change in USDMYR (RHS) Operating margin (RHS) % % % % Remarks IOI s share price is influenced by its profitability or operating margins, which can be moved by price and production levels. However, due to its large proportion of USD-denominated debt, earnings have also been swayed by the movement of the ringgit. Follow the disposal of 70% in downstream operations Loders Croklaan in 3QFY18, we expect a structural uplift in margins going forward % % Source: Company, MPOB, Bloomberg L.P., AllianceDBS Page 4

5 Balance Sheet: Low gearing profile. With the disposal of Loders Croklaan in FY18, we expect FY18F net gearing to fall significantly to the 0.1x level compared to 0.75x at end-fy17, even after factoring in the special dividend payment. This is its lowest level since FY10 and presents an opportunity for inorganic expansion via acquisitions, as the group has revealed no other major nearterm capex plans besides replanting and some new planting activities. Share Price Drivers: CPO pricing. Stronger pricing of CPO and its derivatives are beneficial to IOI s Plantation division by directly improving ASP and margins for its products. Leverage & Asset Turnover (x) Capital Expenditure Inorganic growth. With a newly lowered gearing profile, IOI is in a strong position to pursue acquisition opportunities. We believe the likelihood of a value-accretive purchase is also increased by the group s own valuation, which has been at the higher-end among peers. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may lead to better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Setback to expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback to these plans would negatively affect our valuation due to slower volume growth. ROE (%) Forward PE Band (x) Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background (IOI) is an integrated plantation company, with one of the highest yields in Malaysia and one of the largest oleochemical manufacturing capacities in the world. PB Band (x) Source: Company, AllianceDBS Page 5

6 Key Assumptions FY Jun 2016A 2017A 2018F 2019F 2020F CPO price (RM/MT) 2,410 2,706 2,690 2,610 2,615 Mature palm oil hectarage 148, , , , ,940 FFB harvested (k MT) 3,145 3,156 3,308 3,391 3,479 CPO sales volume (k MT) Average MYR/USD Segmental Breakdown FY Jun 2016A 2017A 2018F 2019F 2020F Revenues (RMm) Plantation Property Resource-based 11,551 13,880 11,793 8,343 8,610 Others Total 11,739 14,127 11,994 8,620 8,953 EBIT (RMm) Plantation 769 1, Property Resource-based Others Total 1,239 1,481 1,225 1,137 1,176 EBIT Margins (%) Plantation Property N/A N/A N/A N/A N/A Resource-based Others N/A N/A N/A N/A N/A Total Income Statement (RMm) FY Jun 2016A 2017A 2018F 2019F 2020F Revenue 11,739 14,127 11,994 8,620 8,953 Cost of Goods Sold (9,463) (11,633) (9,925) (6,877) (7,147) Gross Profit 2,276 2,494 2,069 1,743 1,806 Other Opng (Exp)/Inc (1,037) (1,013) (844) (606) (630) Operating Profit 1,239 1,481 1,225 1,137 1,176 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (165) (174) (151) (91.5) (82.6) Exceptional Gain/(Loss) (202) (357) 2,284 (20.4) 0.18 Pre-tax Profit 966 1,087 3,493 1,177 1,251 Tax (320) (332) (284) (292) (300) Minority Interest (16.6) (22.9) (13.8) (13.9) (14.3) Preference Dividend Net Profit , Net Profit before Except , EBITDA 1,791 2,094 1,813 1,709 1,783 Growth Revenue Gth (%) (15.1) (28.1) 3.9 EBITDA Gth (%) (13.4) (5.7) 4.3 Opg Profit Gth (%) (1.0) 19.6 (17.3) (7.2) 3.4 Net Profit Gth (Pre-ex) (%) (7.2) 31.0 (16.4) (2.2) 5.1 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, AllianceDBS Page 6

7 Quarterly / Interim Income Statement (RMm) FY Jun 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 Revenue 3,666 3,473 3,698 3,731 3,720 Other Oper. (Exp)/Inc (3,149) (3,241) (3,386) (3,314) (3,255) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (45.8) (47.0) (37.1) (45.9) (36.3) Exceptional Gain/(Loss) (378) Pre-tax Profit Tax (102) (86.2) (55.1) (114) (119) Minority Interest (11.0) (0.1) (4.6) (2.8) (7.2) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 11.4 (5.3) (0.3) EBITDA Gth (%) 20.5 (38.9) Opg Profit Gth (%) 22.8 (55.3) Net Profit Gth (Pre-ex) (%) 32.0 (61.0) Margins Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Jun 2016A 2017A 2018F 2019F 2020F Net Fixed Assets 9,985 10,087 6,454 6,469 6,456 Invts in Associates & JVs 969 1,121 2,874 3,026 3,183 Other LT Assets Cash & ST Invts 1,938 1,522 3,980 4,712 4,821 Inventory 2,284 2,708 1,903 1,696 1,762 Debtors 1,191 1,561 1, Other Current Assets Total Assets 17,556 18,025 17,391 17,880 18,241 ST Debt 2,478 2,076 1,576 1,576 1,576 Creditor 1,130 1,389 1,224 1,413 1,469 Other Current Liab LT Debt 4,903 5,268 3,373 3,397 3,397 Other LT Liabilities 1,412 1,399 1,427 1,455 1,484 Shareholder s Equity 7,138 7,457 9,342 9,576 9,837 Minority Interests Total Cap. & Liab. 17,556 18,025 17,391 17,880 18,241 Non-Cash Wkg. Capital 2,582 2,949 1,902 1,302 1,352 Net Cash/(Debt) (5,443) (5,822) (969) (261) (152) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, AllianceDBS Page 7

8 Cash Flow Statement (RMm) FY Jun 2016A 2017A 2018F 2019F 2020F Pre-Tax Profit 1,168 1,444 1,209 1,197 1,251 Dep. & Amort Tax Paid (320) (332) (284) (292) (300) Assoc. & JV Inc/(loss) (94.5) (137) (134) (152) (157) Chg in Wkg.Cap. (81.3) (533) 1, (47.6) Other Operating CF ,282 (22.9) (2.3) Net Operating CF 1,632 1,288 4,576 1,753 1,193 Capital Exp.(net) (871) (500) (459) (435) (436) Other Invts.(net) , Invts in Assoc. & JV (1,619) Div from Assoc & JV Other Investing CF (1.3) (1.4) (1.4) Net Investing CF (803) (411) 1,559 (436) (437) Div Paid (473) (566) (1,311) (638) (675) Chg in Gross Debt 733 (37.4) (2,395) Capital Issues (85.7) (688) Other Financing CF (853) (17.3) Net Financing CF (679) (1,308) (3,677) (585) (646) Currency Adjustments Chg in Cash 150 (431) 2, Opg CFPS (sen) Free CFPS (sen) Source: Company, AllianceDBS Target Price & Ratings History Source: AllianceDBS Analyst: Marvin KHOR Page 8

9 DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 9

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