Investment Highlights

• We maintain HOLD but reduce our FV on C.I. Holdings to RM1.56/share (from RM1.93) on an unchanged FY19F PE of 9.0x. We trim our FY19-21 earnings by 19%-20% to factor in lower sales targets and tighter margins given the current cost environment.

• 1QFY19 net profit of RM5.5mil met only 16% of our FY projection. The result was flat sequentially but down 50% YoY as sales dropped and average olein prices fell 16% YoY. Its net margin was unchanged from the previous quarter and has stayed below 1.0% for the past three quarters.

• The company does not quantify its FCL shipments nor does it provide the breakdown of its earnings by geographical markets. Net profit margin remained low given the company’s position in the industry value chain and its largely undifferentiated product line.

• Net gearing rose to 0.88x at end-Sept from 0.79x at endJune. This was still lower than the company’s peak of 1.13x at end-March 2018. However, it is still heavily reliant on short-term borrowings and drew RM31.5mil in debt this recent quarter. It had a net debt position of RM191mil with 97% of its borrowings being short-term in nature.

• It paid no dividends, which was expected. The company has paid a single dividend and in the final quarter of its financial year, for the past two years. It had paid 52% of its net profit in FY18 and 48% in FY17.

• We reiterate that topline growth for the company may be negated by thinning margins. A major challenge for the company is also to retain a positive operational cash flow from better management of its working capital requirements.

• Apart from this, we note the challenges to be: (1) containing the impact of rising input costs on gross margins, given its place in the industry value chain and largely undifferentiated product line; (2) continuing its trajectory of topline growth with higher exports while building a defense for stronger margins in the longer term; (3) improving its cash flows from operations by improving efficiency; (4) reducing net gearing by decreasing dependency on debt for working capital; and (5) providing more visibility on the nature of its revenue growth, which remains opaque given the limited information provided

Source: AmInvest Research - 29 Nov 2018