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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 24 May 2019, 9:34 AM

 

CB Industrial Product - Continuous Contract Flows a Re-rating

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CBIP has received a LOA to build a 10MT/hour mini mill and a 60MT/hour palm oil mill in PNG with total contract value of RM71.2m, bringing YTD POME order-book replenishment to RM252.8m and current order-book to c.RM455.8m. Raise FY19-20E CNP to RM57.3-63.7m after upping order-book replenishment assumptions from RM250-250m to RM380- 300m. Upgrade to OUTPERFORM with higher TP of RM1.25 (from RM0.850) based on higher Fwd. PER of 11.3x with the continuous job flows acting as a re-rating catalyst.

Received LOA for mills in PNG. CB Industrial Product Holding (CBIP) announced that its wholly-owned PalmitEco Engineering has received a Letter of Acceptance (LOA) from New Britain Palm Oil Limited, a subsidiary of Sime Darby Plantation Bhd, to build a 60MT/hour palm oil mill in Papua New Gurney (PNG), Markham Valley. The contract entails setting up a 10MT/hour sterilisation mini mill with target completion over 7 months and 60MT/hour of palm oil mill to be constructed over 20 months. The total value of the contract is RM71.2m.

YTD wins of RM252.8m hit FY19E replenishment target. We are positively surprised by the continuous contract flows as this is CBIP’s third contract awards after it just clinched RM49.8m worth of contract last Friday. This latest RM71.2m contract brings YTD contract wins to RM252.8m, skimming above our FY19E order-book replenishment target of RM250m.

POME’s outstanding order-book at c.RM455.8m. The new contract win of RM71.2m should further lift CBIP’s outstanding order-book to c.RM455.8m (from c.RM384.8m last week). Assuming PBT margin of 15.0% for this RM71.2m project, it should translate into RM10.7m earnings to its bottom-line. Our assumption is in line with its palm oil mill equipment (POME) segment PBT margin of 15.0% in FY18. This implies earnings’ visibility up to early-2020 for its POME division.

Raise our FY19-20E CNP to RM57.3-63.7m (from RM52.2-48.3m) as we up our FY19-20E POME replenishment assumptions to RM380- RM300m (from RM250-250m). We expect CBIP to clinch 2-3 more contracts by year-end, compensating for its exhausted SPV order-book and subdued plantation business. The adjustment in our replenishment assumptions will see greater impact to FY20 earnings given the back- loaded nature of the revenue recognition schedule.

Upgrade to OUTPERFORM (from UNDERPERFORM) with higher Target Price of RM1.25 (from RM0.850) based on higher Fwd. PER of 11.3x applied to higher FY19E EPS of 11.0 sen (from 10.0 sen). Our Fwd. PER currently reflects -0.5SD (from -1.5SD) valuation basis as we believe the continuous contract flows recently should act as a positive re-rating catalyst. Currently, planters under our coverage are on average trading at -1.0SD (range: -2.0SD to +0.5SD) from their respective mean PER.

Risks to our call include: higher-than-expected raw material cost, lower-than-expected order-book replenishment, and higher-than- expected plantation losses.

Source: Kenanga Research - 17 Apr 2019

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