Investment Highlights

• We maintain HOLD but reduce our FV on C.I. Holdings to RM1.93/share (from RM2) as we trim our FY18-20 projections marginally by up to 1.7% on the assumption of higher operating costs. Our FV is based on an unchanged FY19F PE of 9.0x.

• FY18 net profit of RM31mil met 89% of our FY projection. A strong 1H made up for a weak 2H, with the former accounting for 71% of the full FY earnings. FY18 saw a 20% growth in revenue and 15% growth in net profit on higher shipments of full container loads (FCL).

• The company does not quantify its FCL shipments nor does it provide the breakdown of its earnings by geographical markets. Net profit margin remained at 1.2% in FY18 given the company’s position in the industry value chain and its largely undifferentiated product line.

• While net gearing was unchanged from end-2017 at 0.8x, we emphasize that the company has managed to reduce this from its peak of 1.13x at end-March 2018. It is still heavily reliant on short-term borrowings (which last stood at RM228mil, making up 97% of its total debt). Nonetheless it had a net repayment of debt (of RM5.4mil) in the 4Q, reversing the rising trend on debt that had begun in early FY17.

• For its 4Q, revenue dropped 9% YoY on lower FCL shipments and lower palm olein prices. Its net margin remained below 1% for a second quarter, once again attributing this to lower forex gains arising from a stronger ringgit.

• The company paid a dividend of 10 sen in FY18 with a slightly higher payout ratio of 52% vs. 48% seen in the preceding year.

• We continue to project a rising trend for top and bottom lines going forward with a net profit growth of 11% in FY19, but forecast margins to stay thin. A major challenge for the company is to retain a positive operational cash flow from better management of its working capital requirements.

• Apart from this, we note the challenges to be: (1) containing the impact of rising input costs on gross margins, given its place in the industry value chain and largely undifferentiated product line; (2) continuing its trajectory of topline growth with higher exports while building a defence for stronger margins in the longer term; (3) improving its cash flows from operations by improving efficiency; (4) reducing net gearing by decreasing dependency on debt for working capital; and (5) providing more visibility on the nature of its revenue growth, which remains opaque given the limited information provided.

Source: AmInvest Research - 23 Aug 2018