CBIP’s FY18 core net profit of RM51.8m (-25.7%) came in below expectations, accounting for only 75.5-78.3% of our and consensus estimates, mainly on weaker-than-expected earnings at palm oil mill engineering division (arising from cost overrun in a previous overseas project amounting to RM12m in 4Q18) were the key culprit to the disappointing set of results. We lower our FY19-20 core net profit forecasts by 18.6% and 11% to account for lower EBIT margin assumptions at the palm oil mill engineering division. SOP-derived TP cut by 14.4% to RM1.01 as we lower our core net profit forecasts and update CBIP’s latest net debt position. Downgrade to HOLD as valuation is no longer attractive following (i) the downward revision in our core net profit forecasts, and (ii) recent share price appreciation.

Below expectations. 4Q18 core net loss of RM0.5m (vs. core net profits of RM12.6m in 3Q18 and RM6.2m in 4Q17) took FY18 core net profit to RM51.8m (-25.7% YoY). The results missed expectations, accounting for only 75.5-78.3% of our and consensus estimates. Weaker-than-expected earnings at palm oil mill engineering division (arising from cost overrun in a previous overseas project amounting to RM12m in 4Q18) were the key culprit to the disappointing set of results.

Dividend. Proposed 2nd interim DPS of 2 sen, bringing total DPS for FY18 to 4 sen, translating to dividend yield of 3.6%.

QoQ. 4Q18 performance slipped into a core net loss of RM0.5m (from a core net profit of RM12.6m in 3Q18) due mainly to significantly weaker earnings at palm oil mill engineering division (arising mainly from cost overrun in a previous overseas project, which amounted to circa RM12m) and SPV division (due to the absence of new job replenishment).

YoY. 4Q18 performance slipped into a core net loss of RM0.5m (from a core net profit of RM6.2m in 4Q17), as turnaround at the upstream plantation division was more than negated by significantly weaker contributions from palm oil mill engineering and SPV divisions (due to the same reasons mentioned as above).

YTD. FY18 core net profit declined by 25.7% to RM51.8m as lower losses at the upstream plantation division was more than offset by weaker earnings at palm oil mill engineering division (arising from cost overrun in a previous project overseas in 4Q18).

Orderbook. Orderbook for oil mill engineering division remained largely unchanged at RM335m as at 31 Dec 2018 (vs. RM336m as at 30 Sep 2018), while orderbook at the SPV division has been negligible since 3Q18. While the oil mill engineering division is able to replenish its orderbook (as there is still demand for palm oil mills in Indonesia), 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 lower our FY19-20 core net profit forecasts by 18.6% and 11% to RM42.4m and RM50.2m respectively, largely to account for lower EBIT margin assumptions at the palm oil mill engineering division.

Downgrade to HOLD with lower TP of RM1.01. We lower our SOP-derived TP 14.4% to RM1.01 as we lower our FY19-20 core net profit forecasts and update CBIP’s latest net debt position. We downgrade our rating on CBIP to HOLD (from Buy previously) as valuation is no longer attractive following (i) the downward revision in our core net profit forecasts, and (ii) recent share price appreciation.

Source: Hong Leong Investment Bank Research - 26 Feb 2019