• We maintain HOLD on C.I. Holdings (CIH) but lower our FV to RM2.10/share (from RM2.60) based on a FY18F PE of 11x (from 14x). The group's management of costs and working capital continues to be a dampener on its performance despite of higher sales. Our earnings projections for FY17-FY19 remain unchanged.

• FY17 revenue grew by a stunning 67% YoY but net profit climbed only 2% YoY. This was contributed by poor cost management. Its cost of sales has peaked at 95% of revenue, while gross margins slid to 4% at end-FY17 (from 7% at the beginning of the year, and 12% two years prior).

• The group's net profit margin has halved to 1%. We reiterate the threat of thinning margins given the group's position at the lowest end of the industry's value chain, undifferentiated product line and reduced shipments to higher margin markets.

• Operational cash flow continues to be in the red due to suboptimal working capital management. There was some improvement (evidenced by a shorter operating and cash conversion cycles in FY17) but the main drag was still the high collection period for its receivables (improving by only 2 days to 64 days).

• The group continues to rely on debt to fund its working capital and capex requirements, given its negative operational cashflow. Net gearing ratio shot up to 0.53x (from 0.37x in FY16) on a larger net debt position of RM102mil (from RM64mil).

• The group declared a first and final dividend of 8 sen/share for FY17 vs. 5 sen in the previous year. This translates into a higher payout of 48% vs. 30%.

• We emphasise 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 improve its cash flows from operations by raising efficiency; and (4) To halt the climb in its gearing level by reducing the dependency on debt for working capital.

• While the top-line growth of CIH has been commendable, we believe that a positive operational cash flow and lower dependency on debt will be important for the group's longterm sustainability.

Source: AmInvest Research - 24 Aug 2017