Investment Highlights

• We maintain HOLD and an FV of RM2.10/share on C.I. Holdings (CIH) based on an FY18F PE of 9x.

• CIH saw 1H18 revenue increase 48% YoY and its net profit improve 78% YoY. This result was above expectation at 63% of our FY projection. We raise our FY18-20 earnings by 20-23% to reflect a stronger topline growth.

• The higher revenue was attributed to strong sales of edible oils (for which revenue rose 49% YoY). This meant higher total full container loads (FCL) shipments, the benefit of which CIH said was partially mitigated by a lower average selling price for olein. The corresponding effect of the revenue growth was of a smaller quantum on PBT (up 33% YoY) as its margin for the distribution of edible oils shrunk slightly to 2.3% from 2.7%.

• Net margin for the group is still thin at 1.6% given its position at the lowest end of the value chain, an undifferentiated product line and reduced shipments to higher margin markets.

• Tap-ware and sanitary ware continues to register a small and negligible loss (of RM0.1mil for 1HFY18) and we deem the prospect of finding a buyer for this unit to be challenging given the market conditions.

• Operational cash flow remains negative due to suboptimal management of its working capital. Net gearing is at 0.93x at end-Dec due to large short-term borrowings now at its peak of RM264mil.

• We note that CIH spent RM13mil on capex and had a net drawdown of borrowings of RM28mil in 1H18. Its operating cycle remains high at over 6 months and cash conversion cycle about 3 months.

• We emphasize the main challenges for CIH 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 topline growth with higher exports while building a defence for stronger margins in the longer term; (3) to improve its cash flows from operations by improving efficiency; and (4) to halt the climb in its gearing level by reducing the dependency on debt for working capital.

• We also note the opaque nature of CIH’s revenue growth. The group does not provide a breakdown of its sales of edible oils by markets or customers in its quarterly reports. About 90% of its products are exported with the main markets being Africa, the UAE, Asia and the Middle East.

• The topline growth of CIH has been commendable but we believe that a positive operational cash flow and lower dependency on debt will be important for the group’s long-term sustainability.

Source: AmInvest Research - 1 Mar 2018