Thursday, February 17, 2011

IOI Corporation, Earnings Evaluation

Current Share Price: RM5.71
Price Target: RM6.62

1HFY11 Core Net Profit Rises 13.6%
1HFY06/11 core net profit of RM920.5m accounted for 45.2% of our full-year forecast and 42.3% of the consensus full-year estimates. We consider the results within our expectation as earnings contribution from IOI’s property development is seasonally stronger in 4QFY11.

Dividends
Interim single tier DPS of 8 sen, payable on 30 Mar 2011. For FY11, we expect IOI to declare a total DPS of 20 sen, equivalent to a yield of 3.5%.

Highlights
QoQ. 2QFY11 core net profit rose by 25.3% to RM512.0m, mainly due to:
(1)Higher operating profit contribution from plantation (+5.3%), property investment (+401.7% on the back of a RM61m gain from the disposal of investment properties), and manufacturing divisions (+134.9% on the back of better performance at the refining division) that more than offset a 19.7% decline in property development
division’s operating profit contribution;
(2) Higher contribution from associates and JV entities; and
(3) Lower tax expense.

YoY cumulative. 1HFY11 core net profit rose by 13.6% to RM920.5m due to higher operating profit contribution from plantation (+24.5%), both property development and investment divisions (+1.2% and +216.7% respectively) that more than offset lower contribution from the manufacturing
division (-55.6% on the back of RM73m fair value losses on derivative contracts arising from the adoption of FRS 139).

Risks
(1) Global vegetable oil (including CPO) production comes in higher than expected, resulting in lower-than-expected CPO prices; and
(2) Demand rationing by certain oil consuming countries (such as India) when vegetable oil prices skyrocket to certain level.

Forecasts
FY06/11-13 net profit forecasts maintained for now, pending update from management.

Rating- Positives
(1) Strong earnings outlook, given our bullish view on CPO prices and demand;
(2) Strong balance sheet; and
(3) Proven management track record.

Valuation
Maintain our BUY recommendation as well as our sum-of-parts target price of RM6.62 for now.

Source: HLebroking, HLIB Research

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