Investment Highlights

• We maintain HOLD but reduce our FV on C.I. Holdings to RM2.10/share (from RM2.30/share) as we rollover to FY19, but cut our FY18-20 earnings by 18-48% following a dismal 3QFY18.

• 3QFY18 revenue grew 6%YoY on higher deliveries of full container loads but net profit fell 56%YoY to RM3.6mil, its lowest level in at least three years. The company attributed the weaker gross and net margins to lower forex gains arising from a stronger ringgit.

• The 9MFY18 results met 60% of our FY projection. Its edible oils business saw already precarious margins trimmed by almost a third, leading to a PBT drop of 5%YoY despite of a revenue increase of 33% YoY for the segment.

• The 9MFY18 net profit was 25% higher YoY due to a strong performance in the first two quarters, though the drop in margins to below 1% in 3Q took away much of the revenue gain.

• We reiterate that the company’s position in the industry value chain and largely undifferentiated product line leave it in a vulnerable place, reflected in net margins that have struggled to breach 2.0% in the past two years.

• Operational cash flow remains negative due to suboptimal management of its working capital. Its operating cycle has worsened over time and remains over 7 months, largely due to an extensive period for its receivables collection.

• Net gearing has increased to 1.13x as its short-term borrowings shot up by 21% to RM319mil at end-March from the previous quarter. Both the gearing level and borrowings are at their highest level in many years.

• The main challenges with the company remain: (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 defense for stronger margins in the longer term; (3) to improve its cash flows from operations by improving efficiency; (4) to halt the climb in its gearing level by reducing the dependency on debt for working capital; and (5) to provide more visibility on the nature of its revenue growth, which remains opaque given the limited information provided.

Source: AmInvest Research - 24 May 2018