• We initiate coverage on C.I. Holdings Bhd (CIH) with a HOLD and fair value of RM2.60/share based on an FY18F PE of 14x. This is slightly below its 1-year average of 15.7x and range of 15-16x for consumer goods companies with a small market capitalization of below RM1bil.

• The fair value implies an upside of 11% and dividend yield is at 1.7%.

• The group buys, sells, manufactures and packs various types of edible oils based on refined bleached deodorized (RBD) palm olein. Its sells to around 150 distributors that serve household and industrial (food industry) users.

• CIH's edible oil business took off with the acquisition of Continental Resources Sdn Bhd (CRSB) in 2014. The group has sold off Permanis Sdn Bhd to Asahi Group Holdings for RM820mil in 2011 and returned most of that amount to shareholders via a special dividend. Part of the proceeds went towards funding the purchase of CRSB.

• About 90% of its products are exported with the biggest markets being Africa (45%), the UAE (17%), Asia (12%) and the Middle East (8%).

• We are projecting an annual net profit growth of between 11% and 30% for the three years from FY18, premised on continued top-line growth and a gradual improvement in gross margins.

• We highlight the main challenges for the group to be: (1) To contain the impact of rising input costs on gross margins, given its place in the industry value chain and largely undifferentiated product line; (2) To continue its trajectory of top-line growth with higher exports while building a defence of stronger margins for the longer term; (3) To achieve positive cash flows from operations by improving on efficiency; and (4) To halt the climb in its gearing level by reducing the dependence on debt for working capital.

• While the top-line growth of CIH has been commendable, we believe a positive operational cash flow and a lower dependence on debt are important for the long-term sustainability of the group.

Source: AmInvest Research - 24 Jul 2017