Highlights

• Palm oil mill engineering division still sees good earnings vi sibility un til 2016… thanks to its order book to RM539m (as at end-2Q15) as well as the appreciation of US$ against the MYR (40% of its order book is denominated in US$). Nevertheless, the prolonged low CPO price envi ronment may affect its earnings beyond 2016, as more upstream plantation players may cut capex amidst a prolonged low CPO price envi ronment, hence affecting demand for palm oil mills.

• Still quiet times fo r SPV division… While the management is working to secure several sizeable cont racts for the SPV division, we understand that these potential new contracts may not arrive in time to replenish its depleting order book (RM118m as at end-2Q15), given the i rregular nature of this division’s contract flow.

• Commercialization of zero discharge waste management system may be delayed further… We understand that the zero discharge waste management system is currently pending for pioneer tax status and patent right from relevant authorities. Nevertheless, management highlighted that the commercialization of this system could be delayed further even i f it obtains the pioneer tax status and patent right as the current low CPO price environment may result in upstream plantation players reducing capex. Earnings

Forecasts

• We tweaked our 2015-16 by 1.2% and -4.5%, largely to account for: (1) Slightly higher EBIT margin assumption at the palm oil mill engineering division, which more than offset lower earnings assumptions from the associate and JV entities for 2015; and (2) Lower earnings assumptions from the associate and JV entities for 2016.

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

BUY

Positives

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

Negatives

• Share liquidity.

Valuation

• SOP-derived TP was lowered by 1.4% to RM2.10 as we finetuned our valuation parameters. Maintain BUY recommendation.

Source: Hong Leong Investment Bank Research - 3 Sep 2015