Investment Highlights

• We spoke to CB Industrial Product Holding (CBIP) recently. According to Bloomberg consensus, CBIP is currently trading at FY21F PE of 12.3x and FY22F PE of 12.8x. FY21F dividend yield is estimated to be 2.7%.

• FY21F is expected to be a year of asset monetisation for CBIP. The group is anticipated to dispose of several nonstrategic assets to concentrate on its core businesses of mill manufacturing and plantation. We think that the asset disposals may fetch proceeds of more than RM100mil and hence, there is potential for higher dividends in FY21F.

• Order book for the mill manufacturing division is expected to pick up in FY21F. CBIP hopes to receive new contracts of RM150mil to RM200mil in FY21F compared to zero in FY20. We believe that the contracts would be awarded mainly by plantation companies in Indonesia.

• We reckon that it would be difficult for new contract wins in FY21F to revert to the past yearly levels of RM200mil to RM250mil. We understand that in spite of surging CPO prices, plantation companies are still hesitant in committing capex for palm oil mills. Many planters are of the view that the current level of high CPO prices is not sustainable.

• Although new contract wins were zero in FY20, CBIP’s mill manufacturing division would still be profitable in FY21F due to unbilled sales of RM300mil as at end-FY20 and maintenance and spare part jobs. The unbilled sales of RM300mil would last the group for about a year.

• We believe that the mill manufacturing unit’s pre-tax margin would fall to 20% to 25% in FY21F from 30.1% in FY20. The squeeze in the pre-tax margin in FY21F ismainly due to fewer jobs for maintenance and spare parts as CBIP focuses on its palm oil mill contracts. Maintenance and spare parts command higher margins than turnkey projects for palm oil mills.

• We do not expect the recent 30% to 40% rise in steel costs to erode the pre-tax margin of the mill manufacturing division in FY21F. Changes in steel costs are usually accounted for in the value of the contracts. Steel is estimated to account for 36% of CBIP’s production costs.

• CBIP’s palm refining division is expected to swing into the black in FY21F (FY20: pre-tax loss of RM3.7mil) on the back of a higher off-take and decline in fair value losses on derivative contracts. Average utilisation rate is 65% currently. The palm refinery is located in Tanjung Langsat and it has a processing capacity of 134,000 tonnes per year.

Source: AmInvest Research - 13 Apr 2021