Highlights 

CBIP accepted a letter of award from Felda Palm Industries for a continuous sterilization mill project worth RM15.8m, which involves mechanical and electrical works for upgrading to continuous sterilization system for Felda’s palm oil mill in Lepar Hilir, Pahang.

Financial Impact

Based on our estimates, unbilled sales for the palm oil mill engineering unit likely to have increased to ~RM326m, equivalent to ~1x of the division’s turnover in 2012.

Pros/Cons

Positive but not unexpected, as this is in line with our view that CBIP is on track to secure more contracts and the strong demand prospects for palm oil mill in both Malaysia and Indonesia.

Earnings Forecasts

Maintained, as we have already assumed CBIP to obtain RM300m worth of contracts for 2013 in our earnings forecasts.

Risks

Downside risks-

• Sharp increase in steel plate prices, which may in turn affect CBIP’s engineering division’s profitability; A slowdown in demand for palm oil mills, which would affect CBIP’s engineering division’s fortunes;
• Lower-than-expected FFB production and oil extraction rate at the JV and associate levels.

Rating

BUY

Positives – (1) Proven track record; (2) Favourable demand outlook for palm oil mills; and (3) Strong balance sheet.

Negative – Low share liquidity.

Valuation

SOP-derived TP maintained at RM3.42 (see Figure 1). We continue to like CBIP for: (1) The bright demand prospects for CPO oil mill; (2) Undemanding valuation (current share price of RM2.66 implies 2013 P/E of only 7.8x); and (3) Potential windfall dividends from its huge cash pile of ~50 sen/share. Maintain BUY recommendation on the stock.

Source: Hong Leong Investment Bank Research - 2 Jul 2013