CBIP’s continuous job flows seen as positive rerating catalyst

This article first appeared in The Edge Financial Daily, on April 18, 2019.
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CB Industrial Product Holding Bhd
(April 17, RM1.07)
Upgrade to outperform from underperform with a higher target price (TP) of RM1.25 (previously 85 sen).
CB Industrial Product (CBIP) has received a letter of acceptance (LoA) to build a 10-tonne-per-hour mini mill and a 60-tonne-per-hour palm oil mill in Papua New Guinea (PNG) with a total contract value of RM71.2 million, bringing year-to-date (YTD) palm oil milling equipment (POME) order book replenishment to RM252.8 million and current order book to about RM455.8 million. Raise earnings for the financial years 2019 through 2020 (FY19-20E) core net profit (CNP) to RM57.3 million  to RM63.7 million after upping order book replenishment assumptions from RM250 million to RM250 million, to RM380 million to RM300 million. The upgraded TP of RM1.25 is based on higher forward price-earnings ratio (PER) of 11.3 times with continuous job flows acting as a rerating catalyst

CBIP announced that its wholly-owned PalmitEco Engineering Sdn Bhd has received a LoA from New Britain Palm Oil Ltd, a subsidiary of Sime Darby Plantation Bhd, to build a 60-tonne-per-hour palm oil mill in Markham Valley, PNG. The contract entails setting up a 10-tonne-per- hour sterilisation mini mill with target completion over seven months, and a 60MT per hour of palm oil mill to be constructed over 20 months.

We are positively surprised by the continuous contract flows as this is CBIP’s third job win after it has just clinched RM49.8 million worth of contract last Friday. This latest RM71.2 million contract brings YTD contract wins to RM252.8 million, skimming above our earnings for financial year 2019 (FY19E) order book replenishment target of RM250 million.

We raise our FY19-20E CNP to RM57.3 million to RM63.7m (from RM52.2 million to RM48.3 million) as we up our FY19-20E POME replenishment assumptions to RM380 million to RM300 million (from RM250 million to RM250 million). We expect CBIP to clinch two to three more contracts by year-end, compensating for its exhausted special purpose vehicle (SPV) order book and subdued plantation business.

Our revised TP is based on higher forward PER of 11.3 times applied to higher FY19E earnings per share of 11 sen (up from 10 sen). Our forward PER reflects -0.5 standard deviation (SD) (from -1.5SD) valuation basis as we believe the continuous contract flows recently should act as a positive rerating catalyst. Currently, planters under our coverage are trading at an average -1SD (range: -2SD to +0.5SD) from their respective mean PER. — Kenanga Research, April 17