Investment Highlights

• We are maintaining our HOLD recommendation on CB Industrial Product Holding (CBIP) with an unchanged fair value of RM1.36/share. Our fair value of RM1.36/share is based on a FY19F fully diluted PE of 10x.

• We consider CBIP’s 1HFY18 results to be within our forecast as the bulk of the progress billings for the mill division is usually recognised in the 2H of the financial year.

• CBIP’s net profit declined by 18.3% YoY to RM35.3mil in 1HFY18 dragged by a drop in the earnings of the mill manufacturing unit and losses in the plantation associate and joint venture. CBIP’s associate and joint venture were hit by the plunge in CPO price in 1HFY18.

• Pre-tax profit of the mill manufacturing division fell by 12.3% from RM39.2mil in 1HFY17 to RM34.4mil in 1HFY18 due to a lower order book and fair value loss on investment of RM2.0mil. As a result, pre-tax profit margin of the mill manufacturing division slid from 21.9% in 1HFY17 to 19.7% in 1HFY18.

• CBIP secured a mere RM221.4mil of mill contracts in FY17 vs. RM250mil in FY16. Unbilled order book of the mill manufacturing division was RM444mil as at end-March 2018 vs. RM426mil as at end-December 2017.

• Almost all of CBIP’s customers are Indonesian companies currently. Overseas contracts are denominated in USD.

• Comparing 2QFY18 against 1QFY18, pre-tax profit of the manufacturing unit shrank by 21.7% to RM15.1mil partly due to a forex loss of RM4.6mil.

• Going forward, prospects of the mill manufacturing division are not expected to be exciting. Orders for palm oil mills are falling due to a decline in new plantings of oil palm in Indonesia in the past five years. We have assumed CBIP’s new contracts to be flat at RM220mil in FY18F.

• CBIP’s net cash rose from RM22.3mil as at end-March to RM55.2mil as at end-June 2018. Gross borrowings declined from RM85.5mil as at end-March to RM45.1mil as at end-June 2018.

Source: AmInvest Research - 24 Aug 2018