IOI’s 3Q20 earnings to sink on forex losses

The integrated planter’s 3Q20 headline profits will be weighed down by forex losses of approximately RM200m


IOI Corp Bhd is expected to report only double-digit headline profits for the third quarter ended March 31, 2020 (3Q20), dragged by “huge” foreign-exchange (forex) losses.

The group posted triple-digit earnings of RM213.5 million in 2Q20, its most recently reported quarter, and RM631.7 million in its financial year ended June 30, 2019 (FY19).

Maybank Investment Bank Bhd (Maybank IB) predicts the integrated planter’s 3Q20 headline profits will be weighed down by forex translation losses of approximately RM200 million on its US debt, hurt by the weakened ringgit.

Given tree rest and Sabah’s partial lockdown on palm oil estate and milling operations, the research firm cuts its core earnings per share

(EPS) for IOI’s FY20 and FY21 by 9% and 4% respectively, mainly on lower output and higher cost assumptions.

“With the two to three weeks’ lockdown imposed on six districts in Sabah, there is potential for up to 5.7% FY20 output loss on ~37% of IOI’s total planted area that was affected.

“We cut our FY20 fresh fruit bunches (FFB) output estimate by 6% to 3.05 million tonnes, implying a 10% year-on-year (YoY) decline (from -4% YoY). We also trim our FY21 estimated FFB output by 2%, which still implies a 7% YoY FFB output growth for FY21 as biological tree stress ends,” Maybank IB wrote in a recent note.

It added that the lower output in 3Q20 was compensated by higher crude palm oil (CPO) prices.

The research firm is keeping its projected CPO average selling price (ASP) of RM2,350 per tonne in FY20. CPO ASP for the first six months of FY20 stood at RM2,128 per tonne.

IOI’s oil palm trees are undergoing rest after a good harvest over the past two years, it added.

The group’s output in 2Q20 or the last three months of 2019 contracted 19% YoY, while output in the first two months of 2020 was worse than expected at -30% YoY.

Maybank IB keeps a ‘Hold’ recommendation on the planter with a lower target price of RM4.12, from RM4.40 previously.

It also expects IOI’s downstream division to return to the black in 3Q20, in part due to partial reversal of the RM93 million future value loss on derivative financial instruments recognised in 2Q20.

“Operationally, we anticipate decent oleo margins to offset weaker refinery margins. We understand the group’s operations in Malaysia and Europe are not affected by the partial Covid- 19 lockdown,” it said.

The palm oil player is among those affected by the temporary closure of oil palm plantations in Sabah, which recorded 225 positive Covid- 19 cases as of Sunday.

As some of the infected patients were identified as plantation workers, the state government ordered certain plantations and factories in three districts to temporarily cease their operations until April 14.

The workers were found to be linked to the religious gathering at the Sri Petaling mosque in Kuala Lumpur.

IOI’s earnings rose 9.2% YoY to RM213.5 million in 2Q20, as the plantation division posted a higher profit due to the CPO price rally late last year.

Revenue for the quarter stood at RM1.96 billion, 4% higher YoY, while EPS rose 9.3% to 3.4 sen from 3.11 sen in 2Q19.

The plantation division saw earnings jump 49% YoY to RM175.3 million due to higher CPO price realised.

The average CPO price realised in 2Q20 was RM2,246 per tonne compared to RM1,932 tonne in the corresponding period a year ago.

Meanwhile, profit for the group’s resource-based manufacturing business slumped 79% YoY to RM29.9 million due to losses incurred on derivative financial instruments.