Investment Highlights

• We maintain our HOLD recommendation on C.I. Holdings (CIH), with a lower fair value of RM1.04 (previously RM1.09), pegged to an FY20F PE of 9.0x.

• We downgrade our FY20F–FY21F earnings forecasts by 4–7% to account for expectations of depressed net profit margins at below 1% due to subdued demand for its products.

• CIH’s 4QFY19 core profit came in within expectations at RM3mil (-54% QoQ, -41% YoY), bringing FY19 core profit to RM19mil. The results were within our forecasts while being below consensus’ estimates by 6%.

• FY19 profit declined by 39% YoY amid: (i) revenue declining by 13% mainly attributed to the edible oil segment which saw lower olein prices, (ii) lower product gross margins amid weaker demand and smaller forex gains as the ringgit was stronger in FY19 vs. FY18, (iii) lower other operating income, and (iv) relatively higher tax paid in FY19 due to payment of a RM1mil deferred tax while FY18 had an overprovision of tax of RM3mil and deferment of tax of RM4mil.

• 4QFY19 core profit and revenue worsened by 41% and 27% YoY respectively, due to lower average olein price and lower shipments exported in terms of FCLs. Meanwhile, margins were impacted by weaker demand at destination markets and smaller forex gains due to the stronger ringgit.

• FY19 net profit margin stood at 0.8%, given the company’s position in the industry at the lowest end of the value chain and its largely undifferentiated product line. Meanwhile, its operating cycle worsened over time from an average of 7 months in FY18 to 9 months in FY19 due to an extensive period for its receivables collection. Meanwhile, group borrowings decreased by 17% from RM243mil in FY18 to RM202mil in FY19.

• CIH paid out a dividend of 8 sen in FY19 with a higher payout ratio of 117% vs. ratio of 68% seen in FY18.

• The group will continue to increase revenue via its expansions plans for its edible oil operations and partnerships with property developers for its tapware and sanitary ware divisions.

• However, we reiterate that CIH faces multiple challenges ahead, such as: i) rising input costs impacting gross margins; ii) heavy reliance on short-term borrowings which make up 92% of group’s borrowings with a net debt position of RM82mil; and iii) maintaining its margins and top-line growth in exporting companies in the long term. As such, we maintain our HOLD recommendation on CIH.

Source: AmInvest Research - 30 Aug 2019