CBIP’s 1H19 core net profit of RM12.2m (-69.3%) missed expectations, accounting for only 26.5-29.3% of consensus and our full-year estimates. Weaker-than-expected performances at palm oil mill engineering and upstream plantation divisions were the key culprits to the disappointing set of results. We cut our FY19-21 core net profit forecasts by 23.4%-31.3% to RM31.8m, RM33.5m and RM33.2m respectively, largely to account for lower EBIT margin assumption at palm oil mill engineering division, and higher loss assumption at upstream plantation division. Post downward revision in core net profit forecasts, we downgrade our rating on CBIP to SELL (from Hold), with a lower sum-of-parts TP on CBIP of RM0.78 (vs. RM1.00 earlier).

Missed expectations. 2Q19 core net profit of RM1.1m (QoQ: -89.7; YoY: -94.9%) took 1H19 core net profit to RM12.2m (-69.3%). The results came in below expectations, accounting for only 26.5-29.3% of consensus and our full-year estimates. Weaker-than-expected performances at palm oil mill engineering and upstream plantation divisions were the key culprits to the disappointing set of results.

QoQ. 2Q19 core net profit plunged 89.7% to RM1.1m, dragged by sharply lower earnings at palm oil mill engineering division, and losses at upstream plantation and SPV segments. We note that 2Q19 would have been in the red if not for the RM3.4m tax write-back (arising from the loss making upstream plantation division).

YoY. 2Q19 core net profit plunged 94.9% to RM1.1m, dragged by lower project billing at palm oil mill engineering division, losses at upstream plantation and SPV segments, as well as higher losses from associates and JVs. Note that 2Q19 was partly saved by RM3.4m tax write-back (and it would have been in the red if not for this).

YTD. 1H19 core net profit declined by 69.3% to RM12.2m, mainly on the back of sharply lower earnings at palm oil mill engineering division, losses incurred by SPV division (arising from lower project billing) and losses at upstream plantation and SPV segments (arising from lower palm product prices).

Orderbook. Orderbook for oil mill engineering division declined to RM406m as at 30 Jun 2019 (from RM445m as at 31 Dec 2019), due to the absence of contract secured during 2Q19. Orderbook at SPV division rose to RM76m as at 30 Jun 2019, thanks to a lumpy contract secured in Jun-19 (to supply, deliver, test, commission, and maintenance of 17 units of airport fire vehicles for Malaysia Airports).

Forecast. We cut our FY19-21 core net profit forecasts by 23.4%, 30.1%, and 31.3% to RM31.8m, RM33.5m and RM33.2m respectively, largely to account for lower EBIT margin assumption at palm oil mill engineering division, and higher loss assumption at upstream plantation division.

Downgrade to SELL, TP: RM0.78. Post downward revision in core net profit forecasts, we downgrade our rating on CBIP to SELL (from Hold), with a lower sum of-parts TP on CBIP of RM0.78 (vs. RM1.00 earlier). Better performance at palm oil mill engineering and SPV divisions in 2H (arising from higher project billings) will be partly negated by potential losses from its newly acquired biodiesel facilities (as we believe CBIP may not be able to secure enough offtake, given the glut of biodiesel capacities).

Source: Hong Leong Investment Bank Research - 22 Aug 2019