CB Industrial Product Holding Bhd
(Sept 15, RM4.80)
Maintain “buy” with target price of RM5.75: Current order book remains strong at RM465 million and we think new contract wins could reach at least RM300 million this year, supported by new and returning customers.

In the near term, CBIP could benefit from an increase of matured palm oil areas in Malaysia and Indonesia which is forecast to average 458,000ha per year for 2014 to 2016. This could translate into 5.3 million fresh fruit bunch (FFB) output which requires at least 21 processing mills (40 tonne per hour) per year.

We also anticipate sizeable contracts from its major customers namely Sime Darby Bhd, from its development of Liberia estates (220,000ha), and Felda Global Venture Holdings Bhd from possible replacement of its older conventional mills (currently operates 72 mills).

However, CBIP could face earnings risk of about 11% for financial year 2015 (FY15) to FY16 from higher effective tax rates. This is from the expiration of its pioneer status for Modipalm by February 2015.

However, we only expect its first FFB output by 2016 and significant profit by 2020 due to high start-up costs. Hence, it is only <5% of our sum-of-parts (SOP) for now.

We maintain our “buy”recommendation with higher target price of RM5.75 after switching our valuation method to SOP. We think current valuation of 10 to 12 times of FY14 to FY16 earnings per share is inexpensive given its unique core products and inelastic demand. — Alliance DBS Research Sdn Bhd, Sept 15
 

This article first appeared in The Edge Financial Daily, on September 17, 2014.