Investment Highlights

• Maintain SELL on CB Industrial Product Holding (CBIP) with an unchanged fair value of RM0.95/share. Our fair value is based on a FY19F fully diluted PE of 10x.

• Prospects for CBIP are muted as its order book is expected to remain flat in FY19F. We believe that CBIP’s target is to secure mill manufacturing contracts of RM200mil to RM230mil in FY19F. These would translate into the delivery of four to five palm oil mills in 12 to 18 months’ time.

• We understand that CBIP received RM230mil new contracts in FY18E. Unbilled sales of the mill manufacturing division stood at RM336mil as at endSeptember 2018, which should sustain the group for a year.

• CBIP’s order book has stagnated since FY16. It is increasingly challenging for the group to win more contracts as the plantation industry in Malaysia and Indonesia has been reducing capex. Although CPO prices have recovered to RM2,200/tonne recently, they are still in the doldrums. Hence, plantation companies have no plans to build palm oil mills unless required.

• Also as new plantings of oil palm have been declining in Indonesia, the growth in mature areas has been slowing. As a result, plantation companies in Indonesia have less requirements for palm oil mills.

• As for the special purpose vehicle (SPV) division, CBIP plans to bid for contracts from the government via an open tender process. We believe that the process is competitive and hence, operating profit margins may be thin. This implies that earnings contribution from the SPV unitwould not be as high as it used to be. At the height in FY17, the division accounted for 39.9% of CBIP’s pre-tax profit.

• Currently, the order book for the SPV division has depleted. Unbilled sales of the unit stood at RM2mil as at end-September 2018.

• On a positive note, the plantation division may break even in FY19F based on an average CPO price of RM2,200/tonne compared with a pre-tax loss of about RM3.0mil in FY18E. CBIP has 12,500ha of planted areas in Kalimantan. Out of these, we estimate that 4,000ha to 4,500ha are mature.

Source: AmInvest Research - 11 Feb 2019