Highlights

Key highlights from our recent meeting with CBIP include: (1) CBIP expects contract flow at the palm oil engineering division to sustain; (2) Special purpose vehicle (SPV) division’s good earnings will sustain into 2014; and (3) Plantation landbank will grow to 100k ha by year-end.

CBIP’s orderbook at the palm oil engineering division continues to grow despite lower CPO prices weighing on earnings of upstream oil palm plantation players since last year. Management envisages the strong contract flow to continue into the mid-longer term as it has started seeing oil palm plantation players refurbishing and consolidating palm oil mills (in particularly, the older mills). To cater for the increasing demand for palm oil mills, CBIP is in the midst of constructing another factory, which will bring its capacity higher by another 50% by end-2014.

We expect the good earnings performance at the SPV division to improve further in 2H13 and sustaining into 2014, mainly on the back of the existing orderbook of RM346m. While the contract flow at this division has historically been lumpy and irregular, management appears to be confident that it would be able to replenish the division’s orderbook by penetrating into the assembly of other vehicles for other ministries.

CBIP is on track to achieve new planting of 5,000-6,000 ha per annum. New planting aside, management highlighted that it is on track to add another 34,000 ha of greenfield plantation land in Central Kalimantan, bringing its total plantation landbank in Indonesia close to 100,000 ha by end 2013.

Earnings Forecasts

Maintained, pending release of 3Q results in two weeks’ time. In any case, we believe our earnings forecast for 2013 is achievable given the sizeable orderbook at its two major divisions and the recent CPO price recovery (which will bring its associate and JV contribution back to the black).

Catalysts

• Better-than-expected profit margins at the oil mill engineering and/or SPV divisions; and
• CPO prices strengthen.

Risks

• Sharp increase in steel plate prices;
• Slowdown in demand for palm oil mills;
• Lower-than-expected FFB production and oil extraction rate at the JV and associate levels.
• Lower-than-expected dividend.

Rating

BUY

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

Negatives – Share liquidity.

Valuation

We remain confident on the sustainability of CBIP’s earnings, underpinned by the bright demand outlook for palm oil mill and the sizeable orderbook at its two major divisions (i.e. the oil mill engineering and SPV). Maintain BUY and SOP-derived TP at RM3.39.

Source: Hong Leong Investment Bank Research - 11 Nov 2013