Period  2Q14/1H14

Actual vs. Expectations CB Industrial Product (CBIP)’s 1H14 core net profit (CNP)* of RM44.9m is within expectations as it makes up 45% of consensus forecast (RM99.2m) and 47% of our estimate (RM96.0m).

Dividends  None as expected.

Key Results Highlights YoY, 1H14 CNP increased 20% to RM42.9m due to higher earnings from palm oil mill equipment (POME) division (PBT +15% to RM46.4m). However, earnings growth is capped by lower earnings from retrofitting special purpose vehicle (RSPV) division (PBT -53% to RM4.0m). POME division benefited from improvement in project billing and better PBT margin at 25.2% (against 1H13’s 24.5%). However, RSPV division is weaker due to lower project completion and billing.

 QoQ, 2Q14 CNP declined by 12% to RM21.0m as earnings from RSPV division declined significantly (PBT -26% to RM1.7m) due to reason as stated above.

Outlook  Management expects satisfactory results in FY14E on progress in the implementation of the projects in hand. We expect FY14E CNP to grow slightly by 1% to RM96.0m before increasing more by 3% in FY15E to RM99.0m.

Change to Forecasts We maintain our FY14E CNP of RM96.0m. We also maintained our FY15E CNP of RM99.0m.

Rating Maintain MARKET PERFORM

We expect contract flow from its POME division to be strong in the next 2 years. Share price downside should also be limited due to impending 1-for-1 bonus issue and free warrants. However, long-term earnings growth may be affected after 5 years due to potential limit by Indonesia on ownership of plantation land. We have recently reduced our TP to RM4.85 (from RM5.60) to incorporate this risk (Refer to Sector Update on 25-Aug-2014).

Valuation  Maintain our TP of RM4.85 based on unchanged Fwd. PE of 13x on FY14E core EPS of 37.3 sen.

 The 13x Fwd. PE is used based on 2x premium to Small Cap Fwd. PE of 11x as CBIP market cap has exceeded RM1.2b and hence should deserve premium valuation.

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