What’s new

• Better outlook. Previous meeting with C.I. Holdings Berhad (CIH)’s management indicated that the Group foresees better prospects which will be driven by lower cost incurred following completion of plant under its Palmtop segment. Hence, we believe the Group’s margin shall benefit from the completion of new Palmtop’s plant resulting in operational efficiency. Besides, CIH also expects its business to run at full automation in 2-3 years’ time as in line with Industry 4.0. Having said that, we reckon that fully automated plant will require the Group to spend more on capital expenditure (capex) with more research and development (R&D) to be done before any implementation.

• Result recap. CIH’s revenue and operating profit during 9MFY19 were down 8.3% yoy and 25.3% yoy respectively due to subdued result in Edible Oil products (Revenue: -8.5% yoy and Operating profit: -22% yoy). The uninspiring performance of Edible Oil products was bogged down by lower olein prices.

Comments

• Healthy exports-driven business. CIH’s exports business to remain steady as mainly dominated by Africa and UAE markets, c.60%-70% while 30% and 10% for Asia and Others. The Group’s key trading partner is Africa mainly attributable to higher products demand and consumption as the continent possess one of the highest population rates in the world. Africa’s population growth rate is expected to be doubled from current population from the period 2017 to 2050. Despite various exports demographic distribution, most of the overseas sales are settled in USD.

• Edible oil products segment underpins Palmtop’s topline. According to the management, CIH’s revenue is mainly derived from Palmtop segment which contributes about 85%, while 15% from Continental Resources segment. Products are quoted in USD, ranging from USD12k to USD18k. However, feedstock cost is settled in MYR and RBD Palm Olein is priced at premium to CPO price, which is about RM250/MT to RM300/MT. Therefore, CIH may see its margin improves should RM weakens against USD.

• Improved margin for Edible oil products segment following completion of Palmtop’s third plant. Palmtop segment is running at full capacity and shipped 2,300 containers per month. Due to limited plant capacity, in-house production only shipped 800 containers per month while remaining 1,500 containers were outsourced to external parties. Following completion of Palmtop’s new plant, the Group is able to add another 300 containers per month to in-house production thus reducing dependency on external parties and improving the Group’s margin. Moreover, Continental Resources shipped about 1,000 containers per month with 75% utilization rate. Looking forward, the Group expects capex for Palmtop to reach about RM20m-RM25m. Nevertheless, no additional capex incurred for Continental Resources as the segment already reached its full expansion capacity.
• Vegetable ghee business running smoothly. The plant has capacity to produce up to 100 containers per month and CIH currently produces 50 containers per month. We understand that demand for these products was mainly stemmed from existing clients and markets. The Group expects no further capex for this business segment going forward unless there are demands from other markets.

Earnings Outlook/Revision

• We tweak up our earnings forecast for FY19 and FY20 by 10% and 8.7% respectively to account for better margins as guided by the management.

Valuation/Recommendation

• Maintain HOLD with a higher target price of RM1.54 (RM1.49 previously) following our earnings upgrade. Our valuation is now pegged at PER of 10x FY20 EPS of 15.4sen (14.2sen EPS previously). Our valuation is at -1SD below its trailing mean PE as the stock is lack of trading liquidity and the Group now faces lower product selling price.

• Downside risks to the Group 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.

Source: JF Apex Securities Research - 31 Jul 2019