Investment Highlights

• We spoke to CB Industrial Product Holding (CBIP) recently. CBIP is currently trading at 7.5x FY22F EPS and 7.9x FY23F EPS, according to Bloomberg consensus estimates. FY22F dividend yield is forecast to be 2.8%.

• CBIP’s mill manufacturing division is expected to win RM80mil to RM100mil new contracts in FY22F vs. RM80mil in FY21. We believe that the new mill manufacturing contracts would come mainly from Indonesian companies such as Golden Agri Resources.

• We reckon that most of the contracts would involve mill upgrades instead of turnkey for the construction of new mills. The mill manufacturing division has an unbilled order book of RM341.0mil as at end-FY21. This is enough to sustain CBIP’s profitability for the next 1.5 years.

• We understand that plantation companies in Malaysia and Indonesia have not increased their capex spending on palm oil mills even though CPO prices have surged. Planters are still deferring their capex until it becomes necessary to build a palm oil mill to process FFB. A palm oil mill is required when mature areas reach between 7,000ha and 10,000ha. We reckon that plantation companies may be conserving cash for acquisitions.

• Pre-tax profit margin of the mill manufacturing division is expected to range between 20.0% and 25.0% in FY22F vs. 27.1% in FY21. CBIP will be passing on the higher costs of steel and other raw materials to its customers.

• We gather that CBIP’s steel costs have increased by 20% to 30% so far this year. Steel accounts for 36% of the cost of production while pumps and gear boxes account for another 24%. Subcontracting and logistics make up the balance 40% of production costs.

• On the back of high palm product prices, CBIP’s plantation division is expected to break even in FY22F (FY21 pre-tax loss: RM0.2mil) after recording losses since FY12. The plantation division has been taking a long time to turn around as FFB yields are still low. CBIP has 7,000ha of mature areas and 4,000ha of immature areas in Central Kalimantan, Indonesia.

Source: AmInvest Research - 16 Mar 2022