News  CB Industrial Product Holding (“CBIP”) has announced that it has acquired a 94% stake in PT

Manyangan Jaya (PTMJ) for RM8.23m. Note that PTMJ owns two parcels of land with a total area of 21,674 ha in the Regency of Gunung Mas, Central Kalimantan. Area I consist of 6,267 ha plantation land with Plantation Business License (Izin Usaha Perkebunan or IUP) while Area II consist of 15,407 ha land with Plantation Location Reference. Overall, CBIP total landbank will effectively be increased by 33% to 86,715 ha.

 Rationale for the acquisition is because it provides CBIP an opportunity to further expand its plantation business.

Comments  Effective valuation for the land works out to be RM404/ha which we think is fair. The most comparable transaction was done at RM2732/ha in Jun-2013 for East Kalimantan land, which is 100% with IUP title. As only 29% of this land that CBIP is buying has IUP title, we believe that the lower valuation landbank is justified.

 We are positive in the long term as this should provide sustainable income to CBIP in the long run in line with our long-term positive view on CPO prices.

 However, short-term impact to CBIP is minimal as it should take between 4 to 5 years before revenue can

be generated from the land.

Outlook  Excluding this news, CBIP near-term outlook should be positive as CBIP is expected to win more contracts to build palm oil mills. This should bode well for its Palm Oil Mill Equipment (POME) division, which commands 64% of total PBT in FY13.

Forecast  We expect minimal earnings impact in the near-term as palm oil trees usually will only production after the age of 3. Additionally, the preparation work and the application of necessary license for planting purpose may take up to 2 years. Hence, we maintain FY14E Core Net Profit (CNP) of RM98m. We also maintained our FY15E CNP of RM100m.

Rating Maintain OUTPERFORM

We continue to like CBIP for the following reasons; (i) it is poised to capture strong demand for palm oil mills in 2014, (ii) steady margin improvement historically, and (iii) strong balance sheet with net cash of RM132m.

Valuation  Maintain our TP of RM4.80 based on unchanged Fwd. PE of 13x on FY14E core EPS of 36.9 sen.

Risks to Our Call Lower-than-expected margin for POMM division

 Lower-than-expected sales or margin from RSPV division.

 Lower-than-expected CPO prices.

Source: Kenanga