News  CB Industrial Product (CBIP) has proposed a 1-for-1 bonus issue and 1-for-3 bonus issue of warrants.

 Tenure for the warrants are 5 years while the indicative Exercise Price for the Warrants is RM2.82, which represents a 20% premium to the theoretical ex-bonus price of the shares at RM2.35.

Comments  We are positive on the proposed 1-for-1 bonus issue as it rewards shareholders and also improves the stock’s liquidity. Additionally, the warrants allow CBIP the flexibility to get additional funds via conversion of warrants into shares. We think that the funds raised will then be useful for development of its plantation landbank in Indonesia. Note that throughout the 5 years lifetime of the Warrants, CBIP may raise up to a maximum of RM255.7m, assuming full conversion.

 Pending Bursa and shareholders’ approvals, the bonus issue is expected to be completed by 4Q14. Post-bonus, the share base will increase by 100% to 544m shares. Hence, the current share price will also be adjusted from RM4.83 to RM2.42, while our TP will be adjusted accordingly from RM5.60 to RM2.80.

Outlook  Excluding this news, CBIP’s fundamentals are strong. Our estimate shows that its Palm Oil Mill Manufacturing (POMM) division has a very strong orderbook of ~RM520m. This means earnings visibility until 4Q15.

Forecast  We maintain our core earnings forecast for both FY14E (RM96m) and FY15E (RM99m).

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 improvement historically.

Valuation  Maintain our TP of RM5.60 (Ex-Bonus: RM2.80) based on FY15E Fwd. PE of 15x. Our 15.0x Target Fwd. PER is the maximum valuation that we are using as CBIP is now trading at a 15% discount to average mid-cap plantation peers’ Target PE. The 15% discount is justified in our view as we estimate that it should take CBIP at least another 5 years before its plantation division becomes a major earnings contributor and hence only deserves the pure planter valuation by then.

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