Highlights

• Higher than expected order book replenishment. CBIP has secured about RM440m new contract so far in 2015 for its palm oil mill engineering (POME) division. This is above our assumption of RM400m for the year. As at Sept 2015, it reported a strong order book of RM478m. We believe that the strong order book will continue to support earnings growth in 2016 and 2017. For 2016, we are assuming RM450m contract replenishment.

• Weak contribution from SPV division. Given the irregular nature of contract flow and depleting order book for this division, performance is likely to stay weak going forward. As at end 3Q15, its order book has declined to RM90m from RM118m as at end 2Q15. However, it will not have a significant impact on group earnings as this division accounted for about 7% of PBT in 9M15 (20% in 2014).

• Plantation division to start contributing positively in 2017/18. Its plantation operation has been incurring losses due to young age profile. We believe that better contribution is likely to come in 2017/18 when oil palm trees reach maturity.

• Potential upside with pioneer tax status. As we have highlighted previously, regaining its pioneer tax status for its POME division would be an earnings catalyst for CBIP. The zero discharge waste management system is currently pending for pioneer tax status and patent right from relevant authorities. Upon approval, this would boost its earnings contribution for the next 5-10 years. Earnings

Forecasts

• We revised our 2016 earnings forecast up by 9% to factor in the higher than expected new contract secured in 2015 and higher 2016 replenishment assumption of RM450m from RM400m previously. Nevertheless, we have yet to factor in the potential earnings contribution from regaining of its pioneer tax status upon approval.

Catalysts

• Better-than-expected profit margins at the POME and/or SPV divisions;

• Regaining pioneer tax status

• 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

• Maintain BUY recommendation with higher target price of RM2.30 (previous TP: RM2.10) based on SOP as we rolled over our valuation to 2017F. We continue to like CBIP for its strong earnings visibility witness by the strong order book and balance sheet.

Source: Hong Leong Investment Bank Research - 16 Dec 2015