• Initiate coverage on C.I. Holdings Berhad (CIH) with a target price of RM2.60, based on 10.4x FY2018F PE. Our fair value for CIH renders 11.6% upside to its current share price. Meanwhile, we also expect a dividend of 3 sen/share (dividend yield of 1.3%) for FY18. As such, investors could expect a total return of 12.9%. CIH is primarily involved in manufacturing and packaging of all types of edible oils. In view of its acquisitions of Continental Resources and PLAMTOP in 2014 and 2015 respectively, we envisage a strong growth in its top line.

• Export-driven business. CIH exports 90% of its products to various parts of the world including Asia, Africa and Middle East. Currently, CIH’s biggest markets are Africa (45%), the UAE (17%), Asia (12%) and the Middle East (8%). Meanwhile, most of the sales are settled in USD.

• Cost plus pricing method mitigates the impact of fluctuation of raw material cost. RBD Plam Olein as a major feedstock for CIH’s products, accounting for 90% of its cost with the remaining 10% being the packaging cost, labour and logistics (port charges, freight, hauler and insurance). Overall, costs are billed in RM. Therefore, CIH may improve its margin should RM weaken against USD.

• Adhere to high quality and conform to various food and quality standards. These criterion are imposed by the respective government agencies and licensing bodies in Malaysia and in countries where CIH products are exported upon specific customer’s request. For example, certificate of United States Food & Drug Administration (US FDA) for direct exports of edible oils & edible oil products to the USA.

• Demand growth is underpinned by population growth in Africa. Major market for CIH is Africa. The region continues to experience high population growth rate. Between 2017 and 2050, the populations of 26 African countries are projected to expand to at least double of their current populations.

• Expansion into manufacturing and packaging of vegetable ghee by set up a new plant. The plant will have a capacity to produce up to 100 containers per month (24,000 MT per annum). We also learnt that the demand for these products and services are stemming from existing clients and markets. Therefore, production could up and running with full capacity upon completion of the plant in 2018.

Earnings Outlook

• We estimate CIH’s earnings to post yoy growth of 72.8%, 33.7% and 44.6% for FY17F, FY18F and FY19F respectively. Our earnings forecasts are in tandem with the top line growth that underpinning by improvement in margin.

• Major risks are: 1.) Volatility in palm oil prices; 2.) Rely heavily on ST borrowings for its working capital; 3.) Thin margin and hinge on management expertise to manage its costs efficiently.

Valuation/Recommendation

• We are initiating coverage on CIH with a BUY call at a target price of RM2.61, based on 10.4x FY2018F PER. Our valuation is pegged at -2SD below its trailing mean PE. The assigned PER also tracks its closest comparable peer, YEE LEE Corporation’s forward PE. Our fair value for CIH translates into a potential upside of 11.65% against its current share price. On top of that, we also expect a dividend yield of 1.28% for FY18F (3 sen per share). As such, investors could expect a total return of 12.93%.

• Overall, we are positive with the growth of the company which are underpinned by strong demand in overseas markets especially in Africa. Despite current high net gearing, we see it as a nature of the business model to rely on short-term borrowings to support the topline growth and it shall trend down from 1.3x in FY17F to 0.8x in FY18F in tandem with the rising bottom line and cash level. In addition, we see no problem for the Group to fulfil its short-term debt obligations with minimal payment risk as export proceeds are mainly in letter of credit (LC) and document against payment (DP).

Source: JF Apex Securities Research - 16 Aug 2017