CBIP’s 9M19 core net profit to RM13.3m (-74.6%) came in below expectations, accounting for only 41.7-45.2% of our and consensus full-year estimates. Weaker-than-expected margin at palm oil mill engineering segment and higher than-expected losses from newly acquired biodiesel plant were the key culprits to the disappointing set of performance. We cut our FY19-21 core net profit forecasts by 30.5%, 15.6% and 16.4%, respectively, mainly to reflect larger biodiesel plant losses and lower margin assumption at palm oil mill engineering segment. We lower our SOP-derived TP to RM0.85 (from RM0.86 previously), to account for lower core net profit forecasts and latest net debt position. Maintain HOLD rating, as we believe continued losses at newly acquired biodiesel facilities will partly offset improved CPO price sentiment.

Missed expectations. 3Q19 core net profit of RM1.1m (QoQ: -3.3%; YoY: -91.3%) took 9M19 core net profit to RM13.3m (-74.6%). The results came in below expectations, accounting for only 41.7-45.2% of our and consensus full-year estimates. Weaker-than-expected margin at palm oil mill engineering segment and higher-than-expected losses from newly acquired biodiesel plant were the key culprits to the disappointing set of performance.

QoQ. Revenue increased by 10.3% to RM101.9m, lifted by higher revenue from upstream plantation segment and higher project billing at the SPV segment (arising from the contract to supply airport fire vehicles). However, core net profit fell marginally (by 3.3%) to RM1.1m in 3Q19, as turnaround at SPV segment and reduced losses from upstream plantation segment were more than negated by weaker contribution from palm oil mill engineering segment (arising from biodiesel plant losses, we believe) and the absence of tax write-back.

YoY. Despite a 21.9% increase in revenue (lifted mainly by higher revenue contribution from palm oil mill engineering and upstream plantation segments), 3Q19 core net profit plunged 91.3% to RM1.1m, dragged mainly by margin erosion at the palm oil mill engineering and SPV segments, as well as losses at biodiesel plant and upstream plantation segment (due to low palm product prices).

YTD. 9M19 core net profit plunged 74.6% to RM13.3m, dragged mainly by margin erosion at palm oil mill engineering segment, biodiesel plant losses, lack of new project replenishment at SPV segment, widened losses at upstream plantation segment (arising from weak palm product prices), and higher finance costs.

Orderbook. Orderbook at oil mill engineering segment declined further to RM385m as at 30 Sep 2019 (from RM406m as at 30 Jun 2019), while orderbook at SPV segment declined slightly to RM74m as at 30 Sep 2019 (from RM76m as at 30 Jun 2019).

Forecast. We cut our FY19-21 core net profit forecasts by 30.5%, 15.6% and 16.4%, respectively, mainly to reflect larger biodiesel plant losses and lower margin assumption at palm oil mill engineering segment.

Maintain HOLD with lower SOP-derived TP of RM0.85. We lower our SOP-derived TP to RM0.85 (from RM0.86 previously), to account for lower core net profit forecasts and latest net debt position. Despite the improving CPO price sentiment will result in improved in upstream plantation turning around and more job flow at palm oil mill engineering segment, we believe all these will be partly offset by continued losses from its newly acquired biodiesel facilities (as we believe CBIP may not be able to secure enough offtake). Maintain HOLD rating.

Source: Hong Leong Investment Bank Research - 2 Dec 2019