Investment Highlights

• We are keeping our SELL recommendation on CB Industrial Product Holding (CBIP) with an unchanged fair value of RM0.95/share. Our fair value of RM0.95/share is based on an FY19F basic PE of 10x. We are now using CBIP’s basic EPS to arrive at its fair value instead of fully diluted EPS as the warrants are out-of-the-money. The exercise price of the warrants is RM2.40/share vs. CBIP’s current share price of RM1.12.

• We have reduced CBIP’s FY19F net profit by 7.4% to account for a higher effective tax rate and lower earnings from the special purpose vehicle unit. CBIP’s FY18 results were 13.9% below our earnings forecast and 29.9% short of consensus estimates.

• The group’s net profit plunged by 77.6% to RM2.0mil in 4QFY18 from RM9.0mil in 3QFY18 as earnings from the special purpose vehicle division dwindled to a mere RM0.8mil from RM11.2mil. This is due to a depleting order book. The division’s unbilled sales dropped to zero as at end-December from RM2.0mil as at end-September 2018. CBIP’s special purpose vehicle unit is bidding for orders from the government currently.

• We believe that CBIP’s net profit would be unexciting in FY19F as its mill manufacturing new order book is anticipated to be flat. We believe that CBIP secured RM255.4mil mill manufacturing contracts in FY18 compared with RM221.4mil in FY17 and RM250mil in FY16. Unbilled order book of the mill manufacturing division stood at RM335mil as at end-December 2018, which was the same as September 2018.

• We believe that orders for palm oil mills are stagnating or falling due to the decline in new plantings of oil palm in Indonesia. Also, plantation companies have been reducing their capex as CPO prices are in the doldrums.

• CBIP’s net profit fell by 12.1% to RM46.3mil in FY18 due to a higher interest expense and lower share of net profits in associates. Share of profits in associates dropped by 86.6% to RM2.1mil in FY18 from RM15.9mil in FY17 dragged by lower CPO price.

• Operationally, pre-tax profit of the mill manufacturing division rose by 18.6% to RM51.4mil in FY18 underpinned by higher project implementation and billings. Pre-tax profit of the special purpose vehicle division climbed by 26.3% to RM44.3mil in FY18 as the unit accelerated the completion of its projects.

• CBIP’s net gearing stood at 3.2% as at end-December 2018 compared with a net cash position of RM67.2mil as at endDecember 2017. Gross borrowings increased to RM123.8mil as at end-FY18 from RM67.3mil as at endFY17.

Source: AmInvest Research - 26 Feb 2019