Investment Highlights

• We are keeping our HOLD recommendation on CB Industrial Product Holding (CBIP) with a lower fair value of RM1.85/share (vs. RM2.00/share previously). Our fair value of RM1.85/share for CBIP implies an FY18F PE of about 12x.

• We have reduced CBIP's FY18F net profit by 12.8% to account for weaker revenue and an EBITDA margin of 15.5% vs. 16.5% previously. CBIP is expected to face a squeeze in operating profit margin due to the stronger MYR. CBIP's overseas contracts are largely denominated in USD. Due to the appreciation of the MYR, revenue is lower upon translation from USD to MYR.

• In spite of the drop in turnover, CBIP's FY18F net profit is expected to be marginally higher than FY17E due to a lower effective tax rate. We have assumed an effective tax rate of 17.0% in FY18F vs. 24.0% in FY17E. CBIP received pioneer tax status for its zero-effluent palm oil mill product in November 2017. As such, earnings from mill contracts secured from November 2017 to November 2022 will enjoy a low effective tax rate of only 7.5% compared with the statutory tax rate of 24%.

• Looking ahead to FY19F, we believe that CBIP will perform better as the group is poised to win more contracts in FY18F. On the back of renewed capex spending, plantation companies are expected to place more orders for palm oil mills in FY18F.

• We forecast CBIP's net profit to improve by 11.4% to RM100.1mil in FY19F. CBIP is expected to receive RM300mil mill contracts in FY18F vs. RM221.4mil contracts in FY17E and RM250mil in FY16. Most of the contracts are anticipated to come from Indonesia and Papua New Guinea (PNG). Also, most of the customers are envisaged to be non-government-linked companies.

• We understand that CBIP has attracted a lot of interest in PNG. As such, the group may be setting up a service centre in PNG. There are four major planters in the palm oil industry in PNG currently. They are Prosper Group, Rimbunan Hijau, New Britain Palm Oil Ltd (under Sime Darby Plantation) and a private company owned by CBIP's major shareholder.

• CBIP's balance sheet is healthy. We forecast a gross DPS of 6 sen per share in FY18F (FY17E: 6 sen), which translates into a net payout of 35.9%. Our assumption ignores the impact of acquisitive activities.

Source: AmInvest Research - 6 Feb 2018