Results

• C.I. Holdings Berhad (CIH) posted a PATAMI of RM3.6m in 3QFY18 which tumbled 67.9% qoq and 55.5% yoy. The lacklustre performance was mainly attributed to lower Olein price and lower forex gains arising from strengthening of Ringgit Malaysia.

• However, 9MFY18’s PATAMI jumped 25.1% yoy on the back of higher revenue that compounded with tax incentive in 2QFY18.

• Below expectation. CIH’s 9MFY18 PATAMI below our forecast by matching 63.3% of our full year earnings in view of lower-than-expected margin.

Comments

• Edible oil products segment’s 3QFY18 PBT down 39.7% qoq due to lower margin. Revenue down 5% qoq as a result of lower average olein prices. However, bottom line fell sharply due to lower margin as a result of the lower forex gain arising from strengthening of Ringgit Malaysia.

• Similarly, YoY performance eroded by lower margin despite higher revenue. Revenue up 5.9% yoy was attributed to increase in total FCL shipments that mitigated the decrease in the average olein price. Despite higher revenue achieved, PBT dropped 54.5% yoy given lower margin due to the strengthening of Ringgit Malaysia.

• Cumulatively, Edible oil products segment’s 9MFY18 PBT down 1.7%. Revenue increased 31.9% yoy, mainly buoyed by higher sales volume. Nevertheless, higher revenue failed to translate into a higher PBT growth no thanks to lower gross margin as affected by strengthening of Ringgit Malaysia.

Earnings Outlook/Revision

• We slash our earnings forecast for FY18 and FY19 by 26% and 37% respectively after taking into account the strengthening of RM against USD.

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

Valuation/Recommendation

• We maintain our BUY call with a lower target price of RM2.36 (previously was RM2.61) after we roll over our valuation to FY19F and ascribe PE of 11.14x FY2019F EPS. Our valuation is at -1SD 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 - 24 May 2018