Investment Highlights

• We maintain HOLD and an FV of RM2.10/share on C.I. Holdings (CIH). We lowered our PE to 9x (from 11x) in lieu of fundamental issues that persist, while raising our earnings projections to reflect the strong 1QFY18 performance.

• The group saw its revenue grew 105%YoY in 1QFY18 from higher shipments of edible oil. It provided no further breakdown or details on the increase.

• The tap-ware and sanitary segment remains in the red while the group resolves to partner with property developers to amend this.

• While the top-line growth was notable, the following issues remain:

1) Net margin was thin at 1% given its position at the lowest end of the value chain, an undifferentiated product line and reduced shipments to higher margin markets.

2) Operational cash flow remains negative due to suboptimal management of its working capital. It continues to rely on debts to fund its working capital and capex requirements. Net gearing shot up to 1.08x as it continued to carry huge short-term borrowings in excess of RM240mil.

• The group did not declare a dividend, as expected.

• 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 a largely undifferentiated product line; (2) to continue its trajectory of top-line growth with higher exports while building a defence for strong margins in the longer term; (3) to improve its cash flows from operations by raising its 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 debts will be important for the group's long-term sustainability.

Source: AmInvest Research - 23 Nov 2017