News  CB Industrial Product Holding (CBIP) has been awarded a contract to build a 60 MT/hour Continuous Sterilisation (CS) palm oil mill in Papua New Guinea. We gather that the total value of the contract is RM46m and the contract is from Gilford Limited, which is a subsidiary of Rimbunan Hijau (PNG) Group.

Comments  We are positive on the news as this is the first CS palm oil mill contract awarded to CBIP by the Rimbunan Hijau Group. In our view, this could lead to potentially more contracts from Rimbunan Hijau Group for its other maturing estates.

  Assuming an EBIT margin of 23% for this RM46m project, this contract should translate into RM9.7m to CBIP’s bottom line. Our assumptions are considered conservative as compared to CBIP POMM division margin of 25.7% in FY13.

Outlook  The recent contract won should boost CBIP’s total outstanding orderbook to an estimated level of RM480m. This means earnings visibility until 3Q15 for its palm oil mill manufacturing (POMM) division.  

Forecast  Maintain our core earnings forecasst for both FY14E (RM98m) and FY15E (RM100m).

Rating Maintain OUTPERFORM

We continue to like CBIP as it is poised to capture strong demand for palm oil mills in 2014 and also for its steady margin improvements.

Valuation  Increased our Target Price to RM4.42 based on a higher Fwd. PER of 12.0x (from 11.0x) on CY14E EPS of 36.9 sen. Our Fwd. PER of 12.0x reflects slight premium against Small Cap Fwd. PE of 11.0x. As its share liquidity and market cap has exceeded RM1.1b, the stock may attract the attention of larger funds in the near-term.

Risks to Our Call  Lower-than-expected contract win for its POMM division.

 Lower-than-expected margin for retrofitting special purpose vehicle (RSPV) division.

  Lower-than-expected CPO prices. 

Source: Kenanga