Investment Highlights

• We raise our FY20F–FY21F earnings forecasts by 3% and 2%, and upgrade our FV by 4% to RM1.40 (from RM1.35) based on 7x FY20F EPS (revised down from 9x previously to reflect the increased competition in the edible oil market and the company’s inability to effectively differentiate its products). Maintain HOLD.

• C.I. Holdings’ (CIH) 1HFY20 core net profit beat expectations, coming in at 67% of our full-year forecast and the full-year consensus estimates. We believe the variance against our forecast came mainly from betterthan-expected margins realised.

• CIH’s 1HFY20 net profit jumped 130% YoY thanks to margin expansion. This is due to a 12% increase in direct sales (that fetched better margins) as compared to toll packing sales. Furthermore, we believe the company benefited from the increase in refined, bleached, deodorized (RBD) palm olein prices during the quarter, which allowed it to increase the product selling prices, boosting margins. The average olein price surged by 19% in 2Q (Exhibit 2).

• Moving forward, the company will continue to grow its revenue via its expansion plans for its edible oil operations and partnerships with property developers for its tapware and sanitary ware division.

• Based on the RBD palm olein price trend which has started to taper off since the beginning of 3QFY20, we believe the company’s margins could start to ease in quarters ahead.

• We reiterate that CIH is currently facing multiple challenges ahead, such as: i) volatility in margins; ii) its inability to grow export sales, which we believe is due to increased competition from other vegetable oils; and iii) a heavy reliance on costlier short-term borrowings (95% of total debt) to fund its operations and a high net debt and gearing of RM174mil and 0.80x as at 31 Dec 2019

Source: AmInvest Research - 27 Feb 2020