CBIP’s 9M18 core net profit of RM50.4m (-21.4%) came in below expectations, accounting for only 67.8-68.8% of our and consensus full-year forecasts, mainly on lower-than-expected margin at oil mill engineering segment. We cut FY18-20 core net profit forecasts by 3.8-7.8%, as we lower our EBIT margin assumption at the oil mill engineering division and assume no new job replenishment at the SPV division in FY19. We lowered our SOP-derived TP by 23.9% to RM1.21 as we (i) lower our FY18-20 core net profit forecasts, (ii) update CBIP’s latest balance sheet position, and (iii) lower our valuation on its planted landbank in Indonesia. Maintain BUY rating.

Below expectations. 3Q18 core net profit of RM10.7m (QoQ: -35.9%; YoY: -51.5%) took 9M18 core net profit to RM50.4m (-21.4%). The results came in below expectations, accounting for only 67.8-68.8% of our and consensus full-year forecasts, mainly on lower-than-expected margin at oil mill engineering segment

QoQ. 3Q18 core net profit declined by 51.5% to RM10.7m, due mainly to lower project billings at both oil mill engineering and SPV divisions and higher finance costs, but partly mitigated by improved associate and JV performance (arising from seasonally higher FFB production).

YoY. 3Q18 core net profit declined by 35.9% to RM10.7m, due mainly to lower project billings at both oil mill engineering and SPV divisions and higher finance costs, and weaker associate and JV performance (arising from lower palm product prices and output), but partly offset by higher earnings contribution from SPV division (arising from lower production costs).

YTD. 9M18 core net profit declined by 21.4% to RM50.4m mainly on weaker JV and associate earnings (arising from lower palm product prices and output).

Orderbook. Orderbook for oil mill engineering and SPV divisions declined to RM336m and RM2m respectively as at 30 Sep 2018 (from RM343m and RM15m respectively as at 30 Jun 2018). We believe the oil mill engineering division is able to replenish its orderbook (as there is still demand for palm oil mills in Indonesia). However, we expect dry spell for contract flow at the SPV division arising from ministerial position changes (post GE14 results), which will likely result in delay in new contract awards.

Forecast. We cut FY18-20 core net profit forecasts by 3.8-7.8%, as we lower our EBIT margin assumption at the oil mill engineering division and assume no new job replenishment at the SPV division in FY19 (vs. job replenishment assumption of RM50m previously).

Maintain BUY; TP: RM1.18. We lowered our SOP-derived TP by 23.9% to RM1.18 as we (i) lower our FY18-20 core net profit forecasts, (ii) update CBIP’s latest balance sheet position (from a net cash of RM69.6m as at 30 Jun 2018 to a net debt of RM5.6m as at 30 Sep 2018 as the company took on more debt), and (iii) lower our valuation on its planted landbank in Indonesia. Despite the sharply reduced SOP derived TP, we maintain our BUY rating on CBIP as we believe recent share price adjustment is grossly overdone.

Source: Hong Leong Investment Bank Research - 23 Nov 2018