CB Industrial Product Holding Bhd
(Sept 3, RM1.75)
Maintain buy recommendation on CB Industrial Product Holding Bhd (CBIP): Its palm oil mill engineering division still sees good earnings visibility until 2016, thanks to its order book of RM539 million (as at end-second quarter 2015 (2Q15) as well as the appreciation of the US dollar against the ringgit (40% of its order book is denominated in US dollar). 

Nevertheless, the prolonged low crude palm oil (CPO) price environment may affect its earnings beyond 2016, as more upstream plantation players may cut capital expenditure (capex) amid the low CPO price environment, hence affecting demand for palm oil mills.

While the management is working to secure several sizeable contracts for the special purpose vehicle (SPV) division, we understand that these potential new contracts may not arrive in time to replenish CBIP’s depleting order book (RM118 million as at end-2Q15), given the irregular nature of this division’s contract flow.

We understand that the zero discharge waste management system is currently pending pioneer tax status and patent rights from the relevant authorities. 

Nevertheless, management highlighted that the commercialisation of this system could be delayed further even if it obtains the pioneer tax status and patent rights as the current low CPO price may result in upstream plantation players reducing their capex.

We tweaked our 2015 and 2016 earnings forecasts by 1.2% and -4.5%, largely to account for: (1) Slightly higher earnings before interest and tax margin assumption at the palm oil mill engineering division, which more than offset lower earnings assumptions from associate and joint-venture (JV) entities for 2015; and (2) Lower earnings assumptions from associate and JV entities for 2016.

The catalysts for CBIP are better-than-expected profit margins at the oil mill engineering and/or SPV divisions; stronger CPO price; higher-than-expected dividend payout; and unlocking value at its plantation assets (via associate and JV).

While the risks are a sharp increase in steel plate prices; slowdown in demand for palm oil mills; lower-than-expected fresh fruit bunch production and oil extraction rate at the JV and associate levels.

The sum-of-part-derived target price has been lowered by 1.4% to RM2.10 as we fine-tuned our valuation parameters. Maintain “buy” recommendation. — Hong Leong Investment Bank, Sept 3

This article first appeared in digitaledge Daily, on September 4, 2015.