Highlights

Key highlights from our recent meeting with CBIP include: (1) Contract flow at both the oil mill engineering and special purpose vehicle divisions will sustain into 2014; (2) 1st zero discharge waste management system pilot project on track to be rolled-out by mid-2014; and (3) New planting plan maintained at 6,000 ha for 2014.

We believe CBIP is in good position to secure more contracts for its oil mill engineering division in the near future, given its track record, the increasing harvesting areas of oil palm plantations as well as management’s ongoing efforts in expanding the division’s capacity and customer base.

The special purpose vehicle division’s orderbook of RM216m will translate to another sizeable revenue and earnings recognition in 2014 (albeit weaker vis-à-vis 2013). While bulk of the orderbook is expected to be recognized by 2014, management appears confident that it is able to replenish orderbook for the division, which will in turn sustain revenue and earnings contribution from this division beyond 2015.

Management is confident that its zero waste management technology (upon patented and commercialized) will: (1) Extend Modipalm Continuous Sterilization technology’s tax free status (which is expiring by 2015); and (2) Broaden the group’s earnings stream over the longer term (once it receives buy-in from customers). For now, we have yet to include this in our earnings forecasts.

The new plantation development works will keep CBIP occupied for the next few years, based on management’s unchanged new planting target of 6,000 ha p.a., its vast greenfield plantation landbank as well as intention to acquire more landbank in Indonesia.

Earnings Forecasts

Maintained.

Catalysts

• Better-than-expected profit margins at the oil mill engineering and/or SPV divisions;
• CPO price strengthens;
• Higher-than-expected dividend payout; and
• Unlock of value at its plantation assets (via associate and JV).

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

HOLD

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

Negatives – Share liquidity.

Valuation

Maintain SOP-derived TP of RM4.48 as well as our Hold recommendation on the stock.

Source: Hong Leong Investment Bank Research - 3 Apr 2014