Will you buy IOI now??
IOI Corp Bhd
(Feb 12, RM4.67)
Recommend buy with an unchanged target price of RM4.97: We expect IOI Corp Bhd to post strong earnings recovery in its upcoming second quarter ended Sept 30, 2015 (2QFY16) results. The rebound in earnings will be underpinned by reversal in foreign exchange (forex) losses and stronger downstream contributions.
We expect the group to achieve a headline net profit of at least RM520 million (2QFY15: +RM20 million) in 2QFY16. Core net profit-wise, we expect it to be about RM306 million, increases by 127% quarter-on-quarter (q-o-q) or 4% year-on-year (y-o-y). The sharp q-o-q turnaround is largely due to an estimated forex translation gain of RM221 million (1QFY16 loss of RM719 million) on its US dollar debt exposure as the ringgit strengthened against the US dollar by about 3.5% during the quarter. Operationally, IOI’s plantation division recorded a weaker 2QFY16 fresh fruit bunch (FFB) output of 934,811 tonnes (-3% q-o-q, -7% y-o-y), mainly due to below-average rainfall experienced in Sabah in the first half of 2015 (1H15).
Higher sequential crude palm oil (CPO) average selling price (+5% q-o-q, -2% y-o-y) and palm kernel average selling price (+20% q-o-q, +17% y-o-y) will likely result in stronger q-o-q plantation earnings before interest and tax (Ebit) of RM256 million (+9% q-o-q, -3% y-o-y). As for downstream, we expect an Ebit of RM180 million (1QFY16: -RM25 million) due to the absence of RM203 million fair valuation loss on derivative financial instruments recorded in 1QFY16.
IOI is the best proxy to an El Nino induced CPO price rally in 1H16 given the high liquid nature of the stock and large market cap. Its reinclusion in the syariah compliant list at the end of November 2015 has helped generate fresh interest. — Maybank IB Research, Feb 12