Investment Highlights

• We maintain our forecasts and FV of RM1.02 for CI Holdings (CIH) based on 5x FY21F EPS. This at a 4x multiple discount to its historically average of 9x to reflect a higher market risk premium as the global economy moves closer to a severe downturn amidst the unabated Covid-19 pandemic. Maintain HOLD.

• We expect CIH to experience margin pressure in the coming quarters on the back of weakening CPO prices. CPO prices have eased by close to 30% from RM3,054/tonne during the beginning of the year, to RM2,171/tonne currently (Exhibit 1). We expect CPO prices to stay depressed based on our house view of an average CPO price of RM2,300/tonne in 2020.

• Historically, CIH’s margins expanded on rising CPO prices and contracted on declining CPO prices. This could be seen in: (1) the expansion in its EBIT margin from 1.7% to 4.1% between 2QFY19 and 2QFY20 when CPO prices rose from RM1,920/tonne to RM2,491/tonne; and (2) the contraction in its EBIT margin from 3.2% to 1.7% between 3QFY17 and 2QFY19 when CPO prices declined from RM3,133/tonne to RM1,920/tonne (Exhibit 2).

• We believe this correlation is due to the timing difference between the repricing of CIH’s final products, i.e. edible oil in accordance with CPO prices.

• We believe our forecasts have adequately reflected this. Our forecasts assume EBIT margin to ease from 4.1% in 1HFY20 to 1.7% in 2HFY20F on the back of the falling CPO prices.

• We remain cautious on CIH’s outlook given: i) the inherent volatility in its margins; ii) its inability to significantly 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 respectively as at 31 Dec 2019. On a brighter note, it will continue to grow its revenue via its expansion plans for its edible oil operations and partnerships with property developers for its tap ware and sanitary ware division.

Source: AmInvest Research - 24 Apr 2020