Highlights

Although  the  expiry  of  pioneer  tax  status  for  its  oil  mill engineering  division  (by  Feb-2015)  will  translate  into  higher tax  expense  for  CBIP  starting  next  year,  we  continue  to  see bright  earnings  visibility  at  the  oil  mill  engineering  di vision offsetting  the  higher  tax  expense.  This  is  underpinned  by  its all-time- high order book, the increasing harvesting areas of oil palm plantations as well  as management’s ongoing  efforts in expanding  the division’s capacity.

While  management  remains  confident  in  securing  sizeable contracts  to  replenish  order  book  for  the  SPV  division,  we believe 2015 will be a relatively quiet year  for this division. In our opinion, potential new contracts may not arrive in time to replenish  its  depleting  order  book  given  the  lumpy  and irregular  nature of this division’s  contract flow.

Management highlighted that planting development works will continue (albeit at slower pace of ~3,000 ha p.a. vs. 6,000 ha p.a.  previously),  although  there  are  still  uncertainties  on foreign  shareholding  cap in Indonesia. Earnings Forecasts

We  reduced  our  FY12/15-16  net  profit 

Forecasts by  18.4 -25.9%,  largely  to  reflect:  (i)  higher  tax  expense  arising  from the  expiry  of  pioneer  tax  status  at  the  palm  oil  engineering mill;  and  (ii)  lower  earnings  at  the  SPV  division  (on  the assumption  that  the  division  would  only  secure  new  contract by end -2015), which more than offset slightly higher contract wins  and  EBIT  assumptions  at  the  palm  oil  mill  engineering division.

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

• We  took  the  opportunity  to  fine-tune  our  valuation methodology for its plantation assets in Malaysia (via  JV and associates,  from  P/E  to  market  value),  which  we  believe  is more  reflective  of this asset’s true  value. SOP- derived  TP on the stock is lowered by 6.2% (from RM2.27) to RM2.13, post adjustments  made  in  our valuation methodology  for  its plantation  assets  in  Malaysia  and  net  profit  forecasts. Maintain  Hold recommendation.

Source: Hong Leong Investment Bank Research - 11 Nov 2014