Highlights

CBIP entered into a conditional share sale and purchase agreement to acquire a 94% stake in PT Mayangan Jaya (PTMJ) for RM8.2m.

PTMJ has been granted 2 parcels of land with total area of 21,673.7 ha in Central Kalimantan, Indonesia, consisting: (1) 19,607.2 ha of convertible production forest; and (2) 2,066.6 ha of other purpose area, which will be used as oil palm plantation.

Upon completion, the acquisition will boost CBIP’s plantation land bank by 34% to ~85k ha.

The acquisition is expected to complete by 4Q 2014.

Financial Impact

No immediate impact on earnings, as it takes time to develop a greenfield plantation land bank.

CBIP has no issue in funding the latest land acquisition given its net cash of RM132.3m (as at end 3Q14).

Pros/Cons

Positive, given its inexpensive pricing. CBIP is paying RM380/ha for the land, which is below the price tags of RM469-554/ha it paid for its previous acquisitions.

We note that this is also in line with the company’s strategy to expand its upstream oil palm plantation business, which will in turn diversify its earnings base over the longer term.

Earnings Forecasts

Maintained.

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 maintained at RM4.48. 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. Maintain Hold recommendation on the stock.

Source:Hong Leong Investment Bank Research - 23 Jun 2014