Investment Highlights

• Maintain HOLD on CB Industrial Product Holding (CBIP) with a lower fair value of RM1.36/share (vs. RM1.45/share previously). Our fair value is based on an FY19F fully diluted PE of 10x. In the past five years, CBIP’s PE ranged from a low of 9.0x to a high of 14.0x. Average PE was 11.5x.

• CBIP’s 87.4mil warrants will expire in November 2019. As the exercise price of the warrants is RM2.40/share compared with CBIP’s share price of RM1.32, the warrants are out-of-the-money.

• We have increased CBIP’s FY18F net profit by 15.5% to account for a recovery in the operating profit margin of the mill manufacturing division. The unit’s EBITDA margin is expected to normalise to 22% in FY18F after being hit by cost overruns and impairments in FY17.

• However for FY19F, we have reduced CBIP’’s net profit by 13.9% to account for a lower order book. Previously, we had assumed that CBIP would receive RM300mil mill manufacturing contracts in FY18F, which would boost FY19F net profit. A palm oil mill takes about 12 to 18 months to be completed.

• Now, we are assuming that CBIP would only receive RM220mil contracts in FY18F (FY17: RM221.4mil). We understand that the capex cycle is tepid in the palm oil industry due to languishing CPO prices. Unless necessary, plantation companies are not building new palm oil mills or upgrading their existing ones.

• In addition, as new plantings of oil palm have been declining in Indonesia in the past five years, there are not many new areas coming into maturity. Generally, a palm oil mill is required for mature areas of 5,000 to 10,000ha.

• CBIP’s mill manufacturing contracts in FY18F are expected to come from customers in Indonesia and Papua New Guinea. Overseas customers are envisaged to account for almost all of CBIP’s order book. The overseas contracts are mainly denominated in USD.

• We do not expect the plantation division to swing into profitability any time soon as the oil palm trees are still young and CPO prices are in the doldrums. CBIP’s plantation unit in Kalimantan has been bleeding since FY12. Mature areas stood at 3,000ha to 4,000ha as at endFY17.

Source: AmInvest Research - 27 Jun 2018