This article first appeared in The Edge Financial Daily on June 21, 2018
CB Industrial Product Holding Bhd
(June 20, RM1.29)
Maintain buy with a lower target price (TP) of RM1.55: We believe near-term prospects of CB Industrial Product Holding Bhd (CBIP) replenishing its order book at both its oil mill engineering and special purpose vehicle (SPV) divisions (which are its bread and butter) remain weak, on the back of: i) the persistently low crude palm oil (CPO) price environment, which has in turn resulted in slower-than-expected order book replenishment at the oil mill engineering division; and ii) ministerial position changes (post the 14th general election), which will likely result in delays in new contract awards at the SPV division.
Despite the weak near-term job replenishment prospects, we still see value in CBIP, given its: a) plantation assets in Sarawak (through associate and joint venture) and Kalimantan (32,000ha, of which approximately 11,574ha, or 36%, have already been planted as at March 2018); and b) net cash of RM42.7 million (or eight sen per share as at March 31, 2018).
Based on our assumptions, we conservatively value CBIP’s land bank at RM15,000 per ha (for planted area) and RM500 per ha (for unplanted area), which is lower than current market valuations (of at least RM30,000 per ha for planted area).
Its six sen dividend per share will likely continue, given its net cash of RM42.7 million (or eight sen per share as at end-March 2018) and absence of lumpy capital expenditure going forward. At Tuesday’s share price of RM1.30, the dividend translates into a decent yield of 4.6%.
We cut our financial year 2018 (FY18) to FY20 net profit forecasts by 8.2% to 24.4% to RM74.4 million, RM60.9 million and RM62.4 million, respectively, largely to account for lower job replenishment assumptions for both the oil mill engineering and SPV divisions.
We lower our sum-of-parts-derived TP on CBIP from RM1.69 to RM1.55, as we lower our core net profit forecasts and update our valuation parameters (in particularly its latest plantation land bank).
Following the recent share price retracement (which has retraced by 25% year to date), we believe CBIP is worth a relook as value has emerged. At the share price of RM1.30, the market is pricing CBIP’s effective planted plantation land bank (18,605ha) at only RM8,350 per ha, assuming: 1) the engineering division is valued at eight times FY19 earnings; 2) net cash of RM42.7 million remains; and 3) zero value for its 20,000ha of unplanted land bank. — Hong Leong Investment Bank Research, June 20