Company Focus
Malaysia Equity Research PP 11272/7/2005 18 February 2005
IOI Oleochemical
In line with market expectation
IOI Oleochemical’s (IOIO) annualised 1HFY05 results were in line with consensus but 9% above our expectation. The discrepancy in our forecast was largely due to higher plantation profit and stronger contribution from its associates. Oleochemical division saw a significant drop in margins from 8.4% in 1H04 to 5.3% in 1H05. However, this was largely mitigated by stronger plantation profit. As a result, net profit for 1H05 rose 3.7% y-o-y. As expected, IOIO increased its dividend payment by declaring a 25 sen dividend per share (tax exempt). For FY05, we project a dividend yield of 6%. We maintain our Hold recommendation on IOIO with RM10.00 price target.
• Earnings supported by upstream business. Margins for its oleochemical division were substantially lower compared to last year but recovered slightly from 4.8% in 1Q05 to 6% in 2Q05. Higher feedstock prices and oversupply of oleochemical products have resulted in weakening of margins. Its plantation segment recorded a 16% increase in FFB production resulting in a stronger earnings contribution to the group. • Generous dividend declared. IOIO declared a generous gross DPS of 35 sen vs 21 sen declared in 1HFY04. We revise our gross DPS forecast from 50 sen to 59 sen for FY05 to account for higher payout ratio of 50% (vs 41% previously). • Maintain forecast. We are maintaining our EPS forecast of 85 sen for FY05. We expect a lower contribution from its plantation division in 2H05 due to a weaker outlook on CPO prices. Downstream margins should remain subdued in view of the rising competition with more players expanding their production capacity going forward. However, we expect an earnings recovery of 8% in FY06, driven by lower raw material cost. Forecasts and Valuation
FY Jun (RM'm) Turnover EBITDA Pretax Profit Net Profit Net Profit ex. EI EPS (Sen) EPS (Sen) ex. EI EPS Gth (%) PE (x) P/Cash Flow(x) EV/EBITDA (x) DPS (sen) Div Yield (%) Net Gearing (%) ROE (%) Book Value (RM) P/Book Value (x) FY04 1459.2 274.0 230.5 174.2 174.2 86.3 86.3 27.8 11.0 10.8 7.4 48.6 5.1 11.3 19.0 4.6 2.1 FY05E 1452.7 271.6 229.2 171.1 171.1 84.7 84.7 -1.8 11.2 9.8 7.1 58.8 6.2 0.4 16.8 5.0 1.9 FY06E 1505.0 287.5 245.5 184.5 184.5 91.4 91.4 7.8 10.4 11.1 6.4 59.6 6.3 cash 16.6 5.5 1.7 FY07E 1565.9 311.2 268.5 202.1 202.1 100.1 100.1 9.5 9.5 9.6 5.6 62.5 6.6 cash 16.6 6.1 1.6
HOLD
RM9.50
At a Glance Price Target: 1-year RM10.00 Stock Code: Bloomberg: IOIO MK Reuters:4049.KL MASA: 5266 Sector : Plantation KLCI: 912.62 Reason for Report: 2Q05 results Implications: Neutral Earnings Revision: Nil Consensus EPS: FY05 90.0 sen FY06 94.0 sen FY07 97.2 sen DBSV vs Consensus EPS (% variance): FY05 - 5.9% FY06 - 2.8% FY07 + 2.9% Principal Business
General Data
Issued Capital (m shrs) Mkt Cap (RMm/US$m) Major Shareholders (%) IOI Corp IOI Properties EPF Free float (est.) Average daily volume (m’shrs) 1,918.6 / 202.0 504.9
57.2 5.6 2.8 37.0 0.04
Consensus Analyst Poll
3 Mth 6 Mth 12 Mth Market Sector Avg Rating 3.00 3.00 3.00 3.57 3.90 Buy 1 1 Hold 1 4 4 Sell 1 1
Oleochemicals manufacturing & cultivation of palm oil
Source: Bloomberg Avg Rating: 1 = Sell, 3 = Hold, 5 = Buy
Share Price Chart
Share Price Performance
Share Price Past 1 mth Past 3 mths Past 6 mths Past 12 mths 5% -2% 3% -1% Rel KLCI 8% -3% -10% -7% Rel Sector 8% -4% -9% -7%
MALAYSIA
RM 11.50 10.50 9.50 8.50 100 DAY MA 7.50 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 IOI Oleochemical
Eltricia Foong, CFA · 603-2711 2222 · eltricia@hwangdbsvickers.com.my
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Refer to important disclosures at the end of this report
Company Focus
IOI Oleochemical
Quarterly Results Summary & Comment
FY Jun (RM'm) YTD 1H05 821.6 1H04 675.3 % chg y-o-y 21.7 Quarter 2Q05 396.2 % chg y-o-y 10.2 % chg q-o-q -6.9 Comment
Revenue
Operating profit
109.6
115.8
-5.3
58.5
-4.9
14.4
Y-o-y growth mainly driven by oleochemical division (+26%). However, oleochemical sales dropped by c.10% q-o-q Lower due to decline in oleochemical margins from 8.4% in 1H04 to 5.3% in 1H05. But margins recovered q-o-q (4.8% to 6%). Contribution from plantation division was stronger, up 16% y-o-y.
Interest income Finance costs Associates PBT Tax expense Minorities Net Profit
3.3 -6.3 22.2 128.8 -29.9 -5.7 93.2
0.0 -8.0 17.2 125.0 -28.4 -6.7 89.9
-20.6 29.1 3.0 5.1 -15.1 3.7
1.4 (3.1) 12.9 69.7 (15.0) (3.3) 51.4
336.4 -23.3 32.6 4.7 -2.2 -11.5 8.2
-22.9 -6.5 37.6 18.0 0.6 37.6 23.1
Stronger contribution from associates namely Fatty Chem & Kao
Lower oleochemical earnings was offset by higher plantation profit, hence flattish growth y-o-y
EBIT margin (%) 13.3 17.1 PBT margin (%) 15.7 18.5 Tax rate (%) 23.2 22.7 Source: Hwang-DBS Vickers Research
14.8 17.6 21.5
Segmental breakdown
FY Jun Oleochem Property Plantation Hotel Others Group's Revenue Oleochem Property Plantation Hotel Others EBIT Interest income Finance cost Associates PBT Income tax 1Q04 234.2 11.7 66.6 1.7 1.5 315.8 20.1 4.9 27.7 (0.3) 1.8 54.3 0.6 (4.0) 7.5 58.4 (13.1) 2Q04 276.0 11.3 68.6 2.0 1.7 359.5 22.9 5.9 30.2 (0.1) 2.6 61.5 (0.6) (4.0) 9.7 66.6 (15.3) 1H04 510.2 23.0 135.2 3.7 3.2 675.3 43.0 10.9 57.9 (0.4) 4.4 115.8 1Q05 338.4 11.2 72.0 2.1 1.8 425.4 16.1 5.1 32.0 0.1 (2.1) 51.1 1.8 (3.3) 9.3 59.1 (14.9) 2Q05 305.5 11.5 75.5 2.0 1.6 396.2 18.2 4.1 35.2 0.0 0.9 58.5 1.4 (3.1) 12.9 69.7 (15.0) 1H05 643.9 22.8 147.5 4.0 3.4 821.6 34.3 9.2 67.2 0.1 (1.2) 109.6 3.3 (6.3) 22.2 128.8 (29.9)
(8.0) 17.2 125.0 (28.4)
Tax rate (%)
MI Net Profit
22.4
(3.0) 42.4
23.0
(3.7) 47.5
22.7
(6.7) 89.9
25.2
(2.4) 41.8
21.5
(3.3) 51.4
23.2
(5.7) 93.2
Source: Company
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Company Focus
IOI Oleochemical
Summary Earnings Model
Turnover EBITDA Oleochemical Plantation Property Others EBIT Interest income Finance cost Associates Write back/(provisions) PBT Tax Minorities Net Profit FY04 1,459.2 274.0 86.5 94.6 21.5 8.5 211.0 4.8 -15.2 29.9 0.0 230.5 -46.7 -9.7 174.2 FY05E 1,452.7 271.6 72.3 102.3 22.5 10.0 207.2 4.9 -13.0 30.2 0.0 229.2 -45.8 -12.3 171.1 FY06E 1,505.0 287.5 87.8 99.2 23.6 10.0 220.6 4.9 -10.5 30.5 0.0 245.5 -49.1 -11.9 184.5 FY07E 1,565.9 311.2 101.8 105.6 24.8 10.0 242.3 5.0 -9.6 30.8 0.0 268.5 -53.7 -12.7 202.1 Comment Flattish growth as gain in higher plantation output is offset by lower selling prices of downstream products
Stable contribution from Fatty Chem & Koa Plasticizer
Lower oleochem margin but expected to recover with lower feedstock prices
Sales growth (%) Earnings growth (%) EBITDA margin (%) EBIT margin Tax rate
32.7 27.8 18.8 14.5 20.2
-0.4 -1.8 18.7 14.3 20.0
FY05E 3,320 350,000 1,400 23.00
3.6 7.8 19.1 14.7 20.0
FY06E 3,340 350,000 1,400 23.00
4.0 9.5 19.9 15.5 20.0
FY07E 3,450 350,000 1,450 22.50
Assumptions Oleochemical price (RM/tonne) Manufacturing plant capacity (tonne) CPO price (RM/tonne) FFB yield per ha (tonne)
Source: Hwang-DBS Vickers Research
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Company Focus
IOI Oleochemical
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