IOI Corporation - Worst is over but see better entry in 3Q09

4QFY09 would be its best quarter. IOI Corporation (IOI) likely to deliver a better 4QFY09 net profit compared with 3QFY09 of just RM37.4m. We expect 4QFY09 to be the strongest quarter for IOI due to the absence of derivatives losses and provision for default contracts and it could benefit from the writeback of some forex gains with the Ringgit's appreciation. For FY09, we project a net profit of RM1,038m (ytd: RM496.4m). For 4QFY09, performance will be boosted by seasonally stronger production in 2Q09 and higher contributions from the recently privatised property arm, IOI Properties.

Production started to recover but still below expectation. Recovery in production started in Mar 09 after a sharp drop in February (see bar chart) as it entered the higher production cycle and tree stress has eased. However, management highlighted the recovery is still below expectation. If El Nino is to come in end-3Q or 4Q09, production in 2H10 would be hit again.

Management viewed current price too low given that palm oil supply in 2H09 is likely to be lower than expected. In addition, tight soyoil supply is also an advantage for CPO price. Thus, prices are expected to trade higher by 4Q09 from current level of RM2,400-RM2,500/tonne. This is more bullish than our expectation of an average CPO price of RM2,200/tonne for 2009. The difference is due to the demand outlook which we are expecting a slowdown vs management’s optimism.

Growth in FY10 will be driven by higher CPO prices. CPO prices hold the key to IOI’s FY10 performance. Production growth is expected at 3-5% due to its mature acreage. Is manufacturing divisions (especially oleochemical) will remain weak due to softening demand for personal care products in developed countries. Manufacturing used to contribute about 20% to the Group’s operating profits.

We trim our net profit forecasts for FY09 by 6.7% on a higher effective tax rate of 28% (previously 22%) as some of the losses are not tax-deductable. We now project a net profit of RM1,038m (EPS: 16.2sen) for FY09 and a growth of 63.5% to RM1,697m (EPS: 26.5sen) for FY10. Excluding one-off losses in FY09 (net profit would be RM1,543m), FY10 net profit growth would just be 10% yoy.