A play on its property demerger
IOI Corp’s FY13 core net profit was in line and came in 1% above our forecast but 6% below consensus. The slight positive variance against our forecast came from better manufacturing and property earnings which helped to offset higher-than-expected estates costs.
However, the group’s final dividend of 8.5sen was 2.5sen higher than our estimate. We lower our FY14-15 EPS by 3% after imputing in the higher-than-expected estates costs in FY13. The earnings revisions lead to a 2% cut in our SOP-based target price. We retain our Trading Buy call and see short-term catalysts from the property demerger exercise expected to be completed in 4Q.
Key surprises in 4QFY13
IOI’s 4Q plantation earnings were slightly below our forecast due to higher-than-expected operating costs. However, this was offset by stronger downstream contributions thanks to higher sales volumes and profit margins from its refinery and oleochemical sub-segments which benefited from lower feedstock costs. Property development EBIT improved 41% yoy and 5% qoq due to higher property sales. The group's 4Q results also included a forex loss of RM171m on its US$ borrowings due to the weaker ringgit, and a fair value gain on investment properties amounting to RM105m, which we considered as non-core items.
Outlook for FY14
We project that the group will report higher core earnings in FY14, mainly driven by better CPO prices and stronger property contributions from its domestic and overseas projects. This is broadly in line with IOI Corp's guidance of CPO prices staying at prevailing levels during the next few months, its oleochemical division performing well, and positive prospects for the Malaysian property sector.
Property demerger exercise
We remain positive on the group due to the potential value creation from its proposed property demerger exercise which is expected to rerate the group’s property assets. In view of this, we continue to rate the group a Trading Buy.
Publish date: 22/08/13