UOB Kay Hian Research retains ‘sell’ call on IOI Corp

PETALING JAYA: UOB Kay Hian Malaysia Research is maintaining its “sell” call on plantation heavyweight IOI Corporation Bhd as there is no near-term catalysts, with a lower target price of RM3.65 from RM3.94.

The research house said IOI Corp completed the disposal of 70% of Loders on March 1.

After the disposal, IOI declared a special dividend 11.5 sen a share. This, coupled with the interim dividend of 4.5 sen a share and potential final dividend of 5.6 sen a share, could bring total dividend for FY18 to 21.6 sen a share or yield of 4.6%.

“We maintain our fresh fruit bunches (FFB) production growth forecast at 12% on-year for FY18, which is in-line with management guidance,” it said.

UOB Kay Hian Research understands that 50% of the sales proceeds would be utilised for repayment of bank borrowings. Post disposal, the net gearing ratio improved to 0.32 times from 0.78 times as of June 2017.

It said IOI Corp’s production recovery pattern was choppy in FY18. Management was expecting a strong pick-up in FFB production in Q2FY18 and foresees a decline in Q3FY18 due to seasonality.

“However, we understand that FFB production in January and February 2018 remained strong, improving 44% on-year and 30% on-year respectively (vs 23% on-year and 24% on-year for January and February 2017).

“The uneven FFB production recovery pattern was mainly due to the lingering effect from drought, especially Sabah which suffered a longer and more severe drought compared with other regions.

“IOI has about 66% of its estates located in Sabah. Based on our observation, Peninsular Malaysia’s FFB production is back to normal as the drought in Peninsular Malaysia ended earlier than in Sabah,” it said.

In the eight months of FY18, FFB production was at 2,466,498 tonnes (+16% on-year).

UOB Kay Hian Research is maintaining its FFB production growth forecast at 12% on-year for FY18 on the back of a yield recovery, which is within management’s FFB production guidance of 8%-15% on-year.

“FFB production is likely to be weaker on-quarter in Q3FY18 but will improve on-quarter in Q4FY18.

“Management expects FFB production to grow in the low double digits in FY19 on the back of a yield improvement. We are more conservative and expect a FFB production growth of 8% on-year for FY19,” it said.

The research house said about 32% of IOI’s planted areas have a tree age profile of above 10 years, and the majority is located in Sabah.

“Management is targeting to replant between 4% and 6% of total planted areas or 7,000-10,000ha in FY18-19,” it said.

UOB Kay Hian Research said the performance of downstream operations has been choppy in the past few quarters due to the fluctuation of raw material prices.

Post the disposal of its stake in Loders to Bunge, the remaining segments – oleochemical sub-segment and refining sub-segment – are expected to continue to grow on the back of a stable raw material prices outlook.

Sales volumes would also be supported by the steady growth of global and regional economies.

“We have adjusted our net profit forecasts downwards by 14%, 15% and 16% for FY1820 respectively to exclude the contribution from Loders to downstream operations, while increasing associates’ contribution,” it said.