Highlights

CBIP received a letter of award from Gilford Limited (a subsidiary of Rimbunan Hijau) to construct a 60t/hour Modipalm continuous sterilization palm oil mill in Papua New Guinea.

The contract is worth RM46m, and will be recognised in 2014 and 2015 respectively.

Financial Impact

Based on our estimates, the latest contract announcement will boost CBIP’s total unbilled sales for the palm oil mill engineering division to ~RM485.7m, equivalent to 1.53x of the division’s turnover in 2013.

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 (which in turn is underpinned by rising plantation land bank).

Earnings Forecasts

We are taking this opportunity to raise our FY14-15 earnings forecasts higher by 1-14%, largely to reflect: (1) Higher contract wins (RM400m and RM350m vs. RM300m p.a. previously); and (2) Higher EBIT margin assumption at the special purpose vehicle division.

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; and
• Foreign currency exposure.

Rating

HOLD

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 raised by 19.6% to RM4.48 (see Figure 1) as we: (1) Raised our net profit forecasts; and (2) Included CBIP’s plantation landbank in Indonesia (RM20k/ha for planted and RM500/ha for unplanted landbank) in our valuation. We continue to like CBIP for its strong earnings visibility (arising from the bright demand prospects for CPO mill, witness by the strong orderbook) and balance sheet.

However, we believe further share price upside will likely be capped by its current valuation (YTD, share price has risen by 33.2%). Maintain Hold recommendation on the stock.

Source: Hong Leong Investment Bank Research - 18 Mar 2014