Investment Highlights

• We spoke to CB Industrial Product (CBIP) (UNRATED) recently. Based on Bloomberg consensus estimates, CBIP is currently trading at FY22E PE of 6.1x and FY23F PE of 6.4x. FY22E dividend yield is estimated to be 3.9%.

• In spite of robust CPO prices in 1HFY22, we understand that plantation companies have been reluctant to invest in palm oil mills. We gather that large plantation companies prefer to set funds aside for landbank acquisitions instead. Generally, a palm oil mill is required when mature areas reach 7,000ha to 10,000ha.

• Due to this, CBIP is not expected to win as many new mill contracts in FY22E as it used to. The group may secure about RM80mil mill construction contracts in FY22E, which is the same as FY21. CBIP’s highest contract wins were RM374.3mil back in FY11. Silver lining is that the mill engineering division has recurring revenue of RM60mil every year from servicing and spare parts. This was 9.8% of CBIP’s total revenue of RM614.3mil in FY21.

• Pre-tax profit margin of the mill engineering division is envisaged to remain resilient at 20% in FY22E as contracts are priced after accounting for the cost of steel. Hence, increased steel costs is not expected to affect pre-tax margins significantly. Also, CBIP’s workers are paid higher than the minimum wage of RM1,500/month. As such, the group would not be affected by the hike in minimum wage, which took effect in May.

• Excluding trading losses, earnings outlook for the refining division is positive. Hence, higher refining profits (excluding trading losses) may help compensate for unexciting earnings from the mill engineering division in FY22E.

• CBIP’s refining division benefits from a stable processing margin locked in with the customers. Excluding trading losses, we think that the refining division may record a pre-tax profit of more than RM10mil in FY22E. The refining division registered a pre-tax loss of RM8.9mil in 1QFY22 (1QFY21: RM0.9mil pre-tax profit) due to fair value losses of RM13mil on derivatives.

• We reckon that CBIP’s plantation division in Indonesia would break-even in FY22E vs. a pre-tax loss of RM0.2mil in FY21. Although the plantation unit recorded a pre-tax profit of RM7mil in 1QFY22 (1QFY21: RM1.8mil), there is risk that the division may swing into the red in 2HFY22 as CPO prices have declined. CBIP’s planted areas in Central Kalimantan amounted to 13,783ha as of end March. Out of these, about 7,000ha were mature areas.

Source: AmInvest Research - 27 Jun 2022