KUCHING: IOI Corporation Bhd (IOI) faces headwinds in manufacturing, analysts say, while the group’s sequential earnings recovery have been more than priced in.
According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), Indonesia’s B15 programme, together with Malaysia’s zero export tax rate, is most likely going to depress Malaysia’s refining margins in the financial year 2015 forecast (FY16F), in the research house’s view.
The research house believed growth from IOI’s manufacturing segment contribution would increasingly depend on its specialty fats and oleochemicals units, which it perceives would also face fierce competition, thereby gaining flat margins over the next twelve months.
AllianceDBS Research noted that IOI’s fourth quarter of FY15 (4QFY15) FFB and crude palm oil (CPO) output exceeded its initial estimates, as yields picked up in May and June faster than anticipated.
The research house imputed this in its FY15 and FY16 core earnings projections which have been revised by an increase of nine per cent and an increase of seven per cent, respectively.
Based on this revision, it expected IOI’s 4QFY15 core earnings to arrive at RM163 million.
“We believe the counter’s 8.6 per cent share price jump since end-June 2015 ignores the flattish outlook for FFB output from the group’s Malaysian estates over the next few years,” it said.
Meanwhile, AllianceDBS Research noted that as at March 31, 2015, IOI had circa US$1,691 million of US dollar borrowing exposure (including US$600 million Guaranteed Notes at 4.375 per cent due 2022, and US$183 million swapped Japanese yen term loan due 2037-2038) in its books.
For the net of FX gains from US dollar cash and cash equivalents, the research house estimated that the group would incur FY15 FX losses of RM562 million.
“This translates into net debt-to-total equity ratio of 68.9 per cent,” it said.
The research house’s ‘hold’ rating was maintained for a two per cent dividend yield, although it believed IOI’s earnings in subsequent quarters remained at risk from dry weather and competition from Indonesian refiners on the back of B15 export levies.
On key risks to its view, AllianceDBS Research noted that a strong recovery in CPO prices (either data, weather or regulatory-driven) would boost the share price higher than its fair value.
“As IOI is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our price target,” the research house said.