RHB Research has maintained its outperform recommendation on CB Industrial Product Holding Bhd (CBIP) at RM1.89 with a fair value of RM3.45 and said it expected new contracts for the company to start coming through soon.

“Although there was a slowing down of contracts over the last six months, as some plantation companies pushed back capital expenditure plans, we expect this to pick up soon as plantation companies would only be able to delay the setting up of a CPO (crude palm oil) mill by about six months, given that the planted oil palm trees would still come into maturity no matter what the circumstances,” it said.

Commenting on its recent company visit, RHB Research said CBIP’s unbilled order book of RM270 million would be completed in FY09, while negotiations for another RM300 million worth of contracts were ongoing.

It said the strengthening of the US dollar would bode well for the company as about 35% to 40% of its existing outstanding contracts were priced in US dollars, at an estimated RM3.40 per dollar.

“If the ringgit and US dollar exchange rate stays at current levels of close to RM3.80 per dollar for the rest of the year, CBIP stands to gain an additional RM11 million to RM12 million in revenue, or add about 2%-3% to its bottomline,” it said.

RHB Research said CBIP would also stand to benefit from the recent decline in hot-rolled steel plate prices, albeit only partially, as it has bought about half of its steel requirements for FY09 forward at average prices of between RM3,000 and RM3,500 per tonne.

In FY09, CBIP’s average steel cost could be about RM2,750 per tonne, or 19%-21% below FY08’s cost, it said.

On the company’s contracts to supply firefighting equipment and ambulance equipment worth RM116 million and RM100 million, respectively, to the government obtained in FY08, RHB Research said the contracts are likely to be on a recurring basis and the supply would be extended to equipment for the defence ministry as well as for other such products.

“Although this is not part of CBIP’s core business and earns a low margin, this business could still contribute about 10% to CBIP’s bottomline in FY09, and about 5%-6% in FY10-FY11, assuming CBIP completes RM100 million worth of contracts per annum,” it said.

“As our forecasts had only imputed another RM38 million in revenue to be recorded from this business, and had not imputed a recurrence of contract, we now increase the revenue contribution for FY09 to RM130 million and impute about RM100 million in revenue from this business for FY10-FY11,” it said.

RHB Research said the main risks to its forecast include a significant pick-up in oil mill engineering contracts due to faster-than-expected economic recovery and plantation investment in Indonesia as well as Malaysia; a stronger-than-expected fall in steel prices and strengthening of the US dollar resulting in stronger-than-expected margins for the oil mill engineering division; a rise in CPO and other vegetable oil prices caused by weather abnormalities; and a reversal in crude oil prices and thus CPO prices.

This article appeared in The Edge Financial Daily, March 10, 2009.