This article first appeared in The Edge Financial Daily on April 30, 2019

CB Industrial Product Holding Bhd
(April 29, RM1.16)
Upgrade to buy with a higher target price of RM1.36: We are turning more positive on CB Industrial Product Holding Bhd’s (CBIP) stock given: i) the continued strong order book of its palm oil engineering (POE) operations despite the challenging environment in the plantation sector; ii) potential monetisation of non-core assets which could lead to special dividends; and iii) value has emerged on the back of the sluggish performance of its share price since the second half of 2018 (2H18). Furthermore, we do not expect its special-purpose vehicle (SPV) division to incur losses due to its stringent cost discipline, even if it is not able to secure sizeable contracts going forward.

To recap, we downgraded our recommendation for CBIP to “hold” back in July as we were concerned that: 1) a prolonged period of low crude palm oil (CPO) prices could induce plantation players to scale back capital expenditure and hurt CBIP’s POE operations, and 2) the lack of earnings visibility in its SPV segment. Since then, we have observed a rather sluggish performance for its share price, which we believe has priced in most of the negative news.

The key concerns that triggered our downgrade of the group back then revolved around the ability of its 51%-owned subsidiary, SPV division, to secure sizeable contract going forward and its fast depleting order book.

While we understand that the operations have not secured significant contracts so far, it has received periodic maintenance works and small-scale replacement/replenishment of specialised vehicles such as fire trucks and ambulances from the authorities.

Furthermore, the management has engaged in operational streamlining and cost optimisation exercises since last year to mitigate earnings downside risks from this division. As such, although we view that the contributions from SPV operations could be lower, which led us to cut our earnings estimates; we do not anticipate this division to incur losses in financial year 2019 (FY19)  to FY21.

Year-to-date, the group has secured about RM160 million worth of contracts. This brings the outstanding book of its POE segment to about RM410 million as at end-March, which is sufficient to keep CBIP busy till 1H of FY19 even without any sizeable new orders.

The management is optimistic about replenishing its order book by about RM300 million this year, which is within our expectations but higher than RM255 million worth of contracts secured last year. We also gather that there are no apparent delays in contract drawdown from its customers to implement new modipalm mills, despite the persistently subdued CPO price trend since last year. — AllianceDBS Research, April 29