5 May 2010

PP 7767/09/2010(025354)
Malaysia Corporate Highlights
RHB Research
Institute Sdn Bhd
` A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
5 May 2010
MARKET DATELINE

IOI Corporation Share Price

Fair Value
:
:
RM5.43
RM6.85
Good News From Property Division Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (IOICORP; Code: 1961) Bloomberg: IOI MK

Net Net
FYE Turnover Profit ^ EPS ^ Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
June (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 14,600.5 1,897.7 32.1 (0.1) 16.9 - 15.2 3.8 22.7 37.1 1.5
2010f 14,928.2 1,830.4 28.7 (10.5) 18.9 28.0 16.7 3.7 35.7 33.5 2.2
2011f 16,777.2 2,214.0 34.7 21.0 15.7 32.0 14.0 3.2 20.5 28.5 2.5
2012f 18,833.3 2,352.3 36.9 6.2 14.7 34.0 13.1 2.8 19.3 25.8 2.8
Main Board Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates
^ Normalised

♦ Six key takeaways. These include: (1) FFB production weaker than Issued Cap (‘m shrs) –ex 6,381.4
expected; (2) landbank planting progress on target; (3) positive CPO price treasury shrs
view; (4) cost of production flat; (5) manufacturing operations running at Market Cap(RMm) - basic 34,650.8
high utilisation rates, expansion completed; and (6) good news from the Daily Trading Vol (m shs) 12.2

property division – in both Malaysia and Singapore. 52wk Price Range (RM) 4.11-5.72
Major Shareholders: (%)
♦ Bad news offset by good. Despite experiencing weaker-than-expected Tan Sri Lee Shin Cheng 40.1
FFB production caused by the dry weather in the first two months of the EPF 7.2
year, tree stress in its estates in Peninsular Malaysia, as well as mild First State Investments 7.0
labour shortage problems, which saw IOIC’s FFB production in 3QFY06/10 FYE Jun FY10 FY11 FY12
production falling 6.4% yoy, thus resulting in a YTD 9MFY06/10 FFB EPS chg (%) 2.9 10.1 13.6
production decline of 9.1% yoy, we are more positive on IOIC’s earnings Var to Cons (%) 2.4 8.4 8.4
prospects after our recent visit. This is due to the good news coming out of
PE Band Chart
the property development division, which is expected to see a 71% yoy
rise in operating profits in FY10, on the back of recovery in the property
markets in Malaysia as well as Singapore.
PER = 22x
PER = 17x
♦ Risks. Risks include: 1) a reversal in crude oil price trend resulting in PER = 12x
PER = 7x
reversal of CPO and other vegetable oils price trend; 2) weather
abnormalities resulting in an over- or under-supply of vegetable oils; 3)
change in emphasis on implementing global biofuel and trans-fat policies;
and 4) a slow global economic recovery causing lower demand for CPO.
Relative Performance To KLCI
♦ Forecasts raised. All in, we have raised our forecasts by 2.9-13.6% for
FY10-12, after: (1) adjusting our FFB production forecasts to reflect a
IOI Corporation
decline in FFB production of 8% yoy for FY06/10 (from +1% yoy), followed
by a recovery of +6.1% yoy for FY06/11 (from +1.4% yoy) and +3.3% for FBM KLCI

FY06/12 (from +2.2% yoy); (2) adjusting our capacity and capacity
utilisation projections for the manufacturing division to include the
specialty fats expansion in Rotterdam, which we had not included in our
forecast previously; and (3) raising our property development revenue
forecasts to RM1-1.4bn for FY10-13 (from RM650-700m previously), which
has resulted in our property division’s profits rising by 40-60% p.a..

♦ Outperform maintained, fair value raised. Post-earnings revision and

after raising our target PE for the property sector to 14x CY10 (from 13.5x
previously) to be in line with the recently raised implied target PE for the Hoe Lee Leng
sector, we have raised our SOP-based target price to RM6.85 (from (603) 92802184
RM6.65). We maintain our Outperform recommendation on the stock. hoe.lee.leng@rhb.com.my

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♦ Six key takeaways. These include: (1) FFB production weaker than expected; (2) landbank planting progress on
target; (3) positive CPO price view; (4) cost of production flat; (5) manufacturing operations running at high
utilisation rates, expansion completed; and (6) good news from the property division – in both Malaysia and
Singapore.

♦ FFB production weaker than expected. IOIC’s FFB production has been weaker than expected in recent months,
with 3QFY06/10 production falling 6.4% yoy, thus resulting in a YTD 9MFY06/10 FFB production decline of 9.1%
yoy. In March alone, FFB production fell 7.6% yoy, although this was an improvement of 9.2% mom from Feb
2010. The main reasons given by management for the weak production were the dry weather in the first two
months of the year, tree stress in its estates in Peninsular Malaysia, as well as mild labour shortage problems. As
such, for FY06/10, management is now guiding for an 8% yoy decline in FFB production, which is significantly lower
than our original projection of 1.1% growth and previous management guidance of flattish production numbers. We
have therefore reduced our FFB production forecasts to reflect a decline in FFB production of 8% yoy for FY06/10,
followed by a recovery of +6.1% yoy for FY06/11 (from +1.4% yoy) and +3.3% for FY06/12 (from +2.2% yoy).
We now project IOIC’s FFB yields to range between 24.1-26.5t/ha in FY06/10-12 (from 26.5-27.5t/ha previously
and 26t/ha in FY06/09). The recovery in FFB yields in FY06/11 is within management’s expectations of a similar 8%
yoy improvement in FFB production. This recovery, however, is dependant on whether “El Nino” will continue to
result in extreme weather conditions in Malaysia up to May/June 2010, which would then affect production 6-9
months later.

♦ Landbank planting progress on target. IOIC continues to expand its planted landbank aggressively in
Indonesia, intending to plant up about 10,000ha of land in Kalimantan under its 67%-owned subsidiary every year.
Up to end-Dec 09, IOIC had planted up 4,605ha of land already, at a cost of RM12,000-15,000/ha. We expect
planting activities of 10,000ha per year to keep IOIC busy up to FY2014/5, given the total plantable landbank of
about 60,000-65,000ha. As for its 33%-owned Indonesian associate, FFB production from this estate has been
increasing at a rate of more than 50% every year, and we expect this to continue, given the rate of planting of
10,000ha per year. At end-Dec 09, approximately 19,000ha of land at this estate was already mature, with an
average age of about 5 years. We note that the rate of planting is in line with our projections, and as such we
leave our new planting forecasts unchanged.

♦ Positive CPO price view. IOIC continues to uphold its positive CPO price view of RM2,500-2,800/tonne for
CY2010, on the back of strong demand particularly to countries like China, India, Pakistan and Ukraine and a
potential supply shortage due to the dry weather conditions. For the longer term, IOIC does not foresee prices
going back to below the RM2,000/tonne mark due to the structural changes in the industry. We maintain our CPO
price view assumptions of RM2,450/t for FY10, RM2,600/t for FY06/11 and RM2,500/t for FY12.

♦ Cost of production flat. IOIC expects its cost of production (excluding kernel credit) for FY06/10 to be at
approximately RM1,000/tonne, which is in line with the cost of production incurred in 1HFY06/10. Although this is
slightly below our forecasts of RM1,050-1,100/tonne (or RM850-900/tonne including kernel credit) for FY10-12, we
maintain our production cost forecasts, in order to be conservative.

♦ Manufacturing operations running at high utilisation rates, expansion completed. IOIC’s manufacturing
operations continue to perform well, with all segments (ie. refinery, oleochemicals and specialty fats) operating at
80-90% utilisation currently, versus 75-80% in FY09. Although the high utilisation rates for the refinery and
specialty fats divisions are within our expectations, we note that the utilisation rate for the oleochemical division is
higher than our projected 75% for FY10, as we understand there has been marked demand improvement in the
fatty alcohol market recently. We have therefore raised our capacity utilisation projections for the oleochemical
division to 85-90% for FY10-12 (from 75-80% previously). Both IOIC’s 300,000 tonne refinery and 100,000 tonne
specialty fats expansion in Rotterdam are completed and management expects this to be launched officially in
June/July 2010, while the 120,000 tonne specialty fats expansion in Pasir Gudang, Johor, is expected to be
completed at end CY2010. We have adjusted our capacity and capacity utilisation projections to include the
specialty fat expansion in Rotterdam, which we had not included in our forecast previously.

♦ Good news from property division. We believe IOIC’s property division could surprise on the upside, as the
property market in both Malaysia and Singapore have picked up considerably this year. In Malaysia, IOIC has got
approximately RM15.6bn worth of unlaunched projects, while in Singapore, it has S$2.9bn worth of unlaunched
projects, with total development landbank of 1,635ha (of which 25% is in the Klang Valley, 54% in Johor, 21% in
Melaka and the rest in Singapore) (see Table 2). IOIC recently started launching a new township in South Puchong
(Dengkil) called 16 Sierra in Jan 2010, which has 550 acres of land with a development value of RM2.7bn to be
developed over 6-10 years. We understand the response to this development has been very good so far, with most

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of the 250 units launched so far (in two separate launches in Jan and Mar 2010) already sold. As an indication of
the good take-up rate, about 80% of the first launch of 147 units (GDV RM59m) in Jan 2010 was sold within the
first three days of the launch. All in, for 2HFY06/10, IOIC has lined up about RM675m worth of property launches
in Malaysia - in Puchong (88%) and Johor (12%).

♦ Singapore project take-up – so far, so good. In Singapore, IOIC soft-launched 40 units (circ. S$265m GDV) of
its Seascape project in Sentosa at end-Mar 2010, at an average price of S$2,700/sq ft. We understand from Ho Bee
Development’s (IOIC’s 50% JV partner for this project) 1Q2010 results announcement, that about 31 units were
sold by end-April (or about S$205m), equivalent to a take-up rate of 77.5%, which is commendable to say the
least. IOIC intends to officially launch the project sometime this month, as construction is more than 60% complete
already. As we had originally projected the pricing for this project to be S$2,300/sq ft, we have raised our
forecasts to impute the higher pricing, which would raise margins from 20% to close to 30%. Note that earnings
from this project would be reflected in IOIC’s associate profits, given that it is a 50%-owned venture. We expect
the Seascape project to complete by end-FY11, after which, IOIC will start launching its second Singapore
condominium project, the Pinnacle Collection. We have, however, not imputed any contributions from this project
into our forecasts until there is more certainty as to commencement of construction and launching fate. Recall this
project has a GDV of S$1.9bn and has 300 units.

Table 2. IOIC Property Landbank

Developments Balance Land area (ha) Remaining GDV

@ end-2009 (m)

Bandar Puchong Jaya 19.0 MYR 300

Bandar Puteri Puchong 72.0 MYR 1,500
IOI Resort, Putrajaya 90.0 MYR 1,800
Bandar Putra, Kulai 760.0 MYR 6,600
Taman Lagenda Putra, Kulai 52.0 MYR 300
Taman Kempas Utama, Johor 65.0 MYR 500
16 Sierra, South Puchong 217.0 MYR 2,700
Bandar Putra, Melaka 350.0 MYR 1,500
The Verandah, Ampang 1.5 MYR 400
Seascape, Sentosa Cove 1.5 SGD 1,000
Pinnacle, Sentosa Cove 2.2 SGD 1,900

TOTAL (RMm) MYR 15,600

TOTAL (S$m) SGD 2,900

♦ Raised property division forecasts significantly. In Malaysia, IOIC expects to achieve about RM1.1-1.2bn in
property sales in FY10, which is 70% above our sales forecast for FY10 of RM650m and 70-80% above FY09’s
property development revenue. We have therefore raised our property development revenue forecasts to RM1-
1.4bn for FY10-13 (from RM650-700m previously), which has resulted in our property division’s profits rising by 40-
60% p.a..

Risks

♦ Risks include: 1) a reversal in crude oil price trend resulting in reversal of CPO and other vegetable oils price
trend; 2) weather abnormalities resulting in an over- or under-supply of vegetable oils; 3) change in emphasis on
implementing global biofuel and trans-fat policies; and 4) a slow global economic recovery causing lower demand
for CPO.

Forecasts

♦ Raised forecasts. All in, we have raised our forecasts by 2.9-13.6% for FY10-12, after: (1) adjusting our FFB
production forecasts to reflect a decline in FFB production of 8% yoy for FY06/10 (from +1% yoy), followed by a

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 5 May 2010

recovery of +6.1% yoy for FY06/11 (from +1.4% yoy) and +3.3% for FY06/12 (from +2.2% yoy); (2) adjusting
our capacity and capacity utilisation projections for the manufacturing division to include the specialty fats
expansion in Rotterdam, which we had not included in our forecast previously; and (3) raising our property
development revenue forecasts to RM1-1.4bn for FY10-13 (from RM650-700m previously), which has resulted in
our property division’s profits rising by 40-60% p.a..

Valuation and recommendation

♦ Fair value raised to RM6.85, Outperform maintained. Post-earnings revision and after raising our target PE
for the property sector to 14x CY10 (from 13.5x previously) to be in line with the recently raised implied target PE
for the sector (using the RNAV-based target prices), we have raised our SOP-based target price (see Table 5) to
RM6.85 (from RM6.65). We maintain our Outperform recommendation on the stock as we continue to expect
IOIC’s healthy plantation yield management and operating efficiencies to help IOIC maintain a stable earnings base,
while the expansions and improving prospects of the manufacturing division as well as the strong recovery of the
property division will drive medium- term growth. In addition, the M&A potential given IOIC’s cash hoard post-
rights issue which yielded RM1.2bn, could be an added bonus, given its strong acquisition track record.

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F

Turnover 14,600.5 14,928.2 16,777.2 18,833.3 CPO Selling Price (RM/t) 2,450 2,600 2,500
Turnover growth (%) (0.4) 2.2 12.4 12.3 PK Selling Price (RM/t) 1,650 1,700 1,700
FFB production Growth (%) (8.0) 6.1 3.3
Operating Profit 2,376.4 2,577.8 2,981.8 3,174.4
Op Profit Margin (%) 16.3 17.3 17.8 16.9

EBITDA 2,594.1 2,827.8 3,251.7 3,464.1

EBITDA margin (%) 17.8 18.9 19.4 18.4

Depreciation (217.8) (250.1) (269.9) (289.7)

Associates 9.9 64.7 144.5 145.1
Net interest costs (170.5) (149.0) (142.9) (145.1)
Exceptional items (914.2) 0.0 0.0 0.0

Pretax Profit 1,550.1 2,493.4 2,983.5 3,174.5

Tax (486.9) (647.2) (750.8) (800.4)
PAT 1,063.2 1,846.3 2,232.6 2,374.1
Minorities (79.7) (15.9) (18.7) (21.9)
Net Profit 983.5 1,830.4 2,214.0 2,352.3
Net Profit (ex-EI) 1,897.7 1,830.4 2,214.0 2,352.3
Source: Company data, RHBRI estimates

Table 5. SOP Calculation

FV
Valuation basis
(RMm)
Plantation earnings 18x CY10 earnings 28,194.9
Manufacturing earnings 12.5x CY10 earnings 7,689.8
Property investment and devt 13.5x CY10 earnings
9,176.0
earnings

Less: Net debt (2QFY10) (1,289.9)

SOP (RMm) 43,770.9

SOP/share (RM) 6.86

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Chart 1: IOICorp Technical View Point

♦ IOICorp’s share price began a strong uptrend since
touching a low of RM2.02 in Oct 2008 and
confirmed its uptrend when it surpassed the
RM2.96 level in Dec 2008.

♦ The uptrend led the stock to above the RM3.88 and

RM4.85 resistance levels in Apr and Aug 2009,
before a final push that landed the stock near a
tough resistance at RM5.60 in Jan 2010.

♦ Thereafter, even with a sharp correction in late Jan,

it was sustained near the RM5.40 – RM5.60 region
most of the time.

♦ Hovered near the 10-day and 40-day SMAs of

RM5.45 recently, the stock lacks a clear signal
for any significant movement in the near term.

♦ Investors should only turn positive if it breaches

the RM5.60 level with strong volume and
momentum. For now, a firm support is at RM4.85.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer,
invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no
reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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