Investment Highlights

• We maintain a HOLD for C.I. Holdings (CIH) and raise our FV slightly to RM1.09 (from RM1.08) based on a rolled over FY20 PE of 9.0x. We trim our FY19–21 earnings by 12–28% to factor in lower sales targets and tighter margins given the continuous disappointment from earnings.

• 1HFY19 net profit of RM9mil was lower by 59% YoY. This came on the back of an 11% YoY drop in revenue (blamed on a drop in olein prices), lower gross margins (from a decrease in prices due to overstocking in its customer markets) and a drop in other operating income.

• The group has seen its net margin hover below 1.0% for the past four quarters. We believe this indicates a fundamental change in the landscape of its sector.

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

• Net gearing spiked to 1.09x on an increase in its short-term borrowings to RM295mil. This is the third increase on a sequential basis and near the company’s peak of 1.13x seen one year ago.

• It is still heavily reliant on short-term borrowings and had a net debt position of RM222mil, with 98% of its borrowings being short-term in nature.

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

• This quarter marks the second consecutive quarter the company has seen a negative operational cash flow and piled on its debt.

• 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 defence 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 - 28 Feb 2019