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This article first appeared in The Edge Financial Daily on February 27, 2019

CB Industrial Product Holding Bhd
(Feb 26, RM1.07)
Maintain hold with a target price (TP) of RM1.35:
After stripping out disposal gains of RM2.1 million and foreign exchange loss of RM900,000, CB Industrial Product Holding Bhd (CBIP) posted core earnings of RM800,000 (-82% year-on-year [y-o-y], -91% quarter-on-quarter [q-o-q]) in the fourth quarter of financial year 2018 (4QFY18).

The y-o-y drop in core profit was mainly due to lower contributions from its palm oil engineering (POE) segment on cost overruns, lower contributions from its 51%-owned special-purpose vehicle (SPV) operations with muted contract wins, and share of steeper losses of RM1.4 million from its joint venture in the plantation business in 4QFY18 against a share of RM300,000 losses in 4QFY17, dragged by lower crude palm oil (CPO) prices and production.

The group believes that q-o-q comparison does not serve as a good gauge for the group’s financial performance since 4Q is traditionally its strongest quarter for the year, although this particular quarter was hit by cost overruns in one of its overseas projects.

This brings the financial year of 2018’s (FY18) core earnings to RM53 million, which was below our expectations of RM70 million. The group’s current order book for the POE segment remained strong at about RM335 million as at Dec 31, which is sufficient to keep CBIP busy over the next six to nine months, even without any sizeable new orders.

Nonetheless, the order book of its 51%-owned SPV operations dropped to zero as at Dec 31, although we understand such operations continued to perform regular maintenance jobs for the existing clients and the management strives for it to at least break even in FY19 via maintenance works, even if there is no significant contract wins during the year.

As forewarned in our previous note, although we believe the replacement/replenishment of specialised vehicles, such as fire trucks and ambulances, remains part of the government’s operating budget, we are concerned that the new administration’s fiscal consolidation measures could lead to delays in awarding contracts.

This may adversely impact the earnings prospects of this division since its existing order book will be completely exhausted by the end of this year. We remain sceptical of the group’s ability to significantly replenish its order book in the near term.

At present, we have assumed revenue contributions of RM80 million/RM100 million for FY19/FY20 for its SPV operations, which seem to be conservative compared with an average of RM205 million per annum in the past five years.

Nonetheless, we do see downside risks to our assumptions should such operations fail to secure contracts in the coming months.

In a more conservative scenario analysis where we assume no earnings contribution from its SPV segment in the coming years, the group’s FY19 and FY20 core earnings will drop to RM71 million and RM76 million (currently at RM76 million and RM83 million for FY19-20) respectively.

Our earnings estimates, RM1.35 TP and “hold” recommendation are under review, with downside risks expected for our earnings forecasts and TP.

We do not see a significant catalyst to rerate the stock at this juncture in view of: (1) Disappointing 4QFY18 earnings which reaffirm our cautious stance on the group;

(2) Uncertainties relating to CPO price direction and its impact on capital expenditure plans of plantation firms. This could increase the difficulties for its POE segment to replenish order book going forward; and,

(3) Earnings downside risks stemming from its SPV operations as highlighted earlier. — AllianceDBS Research, Feb 26

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