Results

• C.I. Holdings Berhad (CIH) posted a PATAMI of RM16.5m in 2QFY18 which soared 49.6% qoq and 120.5% yoy. The stellar performance was mainly attributed to positive impact of tax reduction by its subsidiary which recently obtained an approval for a tax incentive scheme.

• Similarly, 6MFY18’s PATAMI jumped 119.2% yoy on the back of higher revenue, and further aided by abovementioned tax incentive in 2QFY18.

• Above expectation. CIH’s 6MFY18 PATAMI above our forecast by matching 67.6% of our full year net earnings in view of the unexpected tax incentive during 2QFY18.

Comments

• Edible oil products segment’s QoQ revenue slid given lower sales volume and prices. Revenue down 12.2% qoq as a result of 13% decrease in total Full Container Loads (FCL) shipments and lower average olein prices. However, PBT fell 33.4% qoq in view of lower margin due to the strengthening of Ringgit.

• Meanwhile, YoY revenue increased with higher sales volume but PBT whittled by strengthening of Ringgit. Revenue up 12.2% yoy thanks to 8% increase in total FCL shipments. However, this was partially mitigated by decrease in the average olein price. Despite higher revenue, PBT dropped 19.2% yoy given lower margin due to the strengthening of Ringgit.

• Cumulatively, Edible oil products segment’s 6MFY18 PBT improved 29.3% on the back of higher revenue. Revenue increased 49.2% yoy, mainly buoyed by higher sales volume. Nevertheless, higher revenue failed to translate into a higher bottom line as PBT growth only at 29.3% yoy no thanks to lower gross margin (strengthening of Ringgit) that compounded with higher finance costs (increase of RM3.6m).

Earnings Outlook/Revision

• No change to our earnings forecasts for FY18 and FY19 as we believe the positive effect of tax incentive in 2QFY8 will be offset by anticipated lower margin during 2HFY18 as a result of strengthening of Ringgit.

• 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 maintain our BUY call with an unchanged 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.

• 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 - 1 Mar 2018