Period A 4Q14/FY14

Actual vs. Expectations  CB Industrial Product (CBIP)’s FY14 core net profit (CNP*) of RM92.2m was within expectations, making up 95% of market estimate (RM96.7m) and 96% of our estimate (RM96.0m).

Dividends  No dividend was announced during the quarter, as expected. For FY14, CBIP had paid dividend of 5.5 sen, slightly below our 6.0 sen expected dividend.

Key Results Highlights  YoY, FY14 CNP was flattish at -2% to RM92.2m due to weaker Retrofitting Special Purpose Vehicle (RSPV) segment’s PBT (-51% to RM20.2m) which saw lower project billing. The Palm Oil Mill Equipment (POME) segment recorded better PBT (+14% to RM91.9m) due to improved project completion and billing.

 QoQ, 4Q14 CNP rose 2% to RM25.4m as we observed higher realized forex gains of RM3.4m due to the stronger USD. Also, both POME’s PBT (+16% to RM24.4m) and RSPV’s PBT (+64% to RM10.1m) saw quarterly improvement due to higher project billing and completion.

 Outlook  Management expects satisfactory performance in FY15 on the progress of projects implementation. However, we expect FY15E CNP to decline 9% to RM84m as we expect its pioneer status tax exemption to expire in 2015. Thus we assume a tax rate of 25% from FY15E onwards.

Change to Forecasts  We maintain our FY15E CNP of RM83.7m and introduce our FY16E CNP of RM105.4m.

 Although we expect a weaker FY15E CPO price assumption of RM2,200/MT (-8% YoY), we think impact to bottom line is negligible. Note that lower CPO prices will only affect earnings from associates and joint ventures, which altogether only accounted for 7% of earnings in 2014.

Rating Downgrade to UNDERPERFORM from MARKET PERFORM While we expect contract flow from its POME division to be strong in the next two years, volatile earning from the RSPV division is likely to keep earnings growth limited. Furthermore, we expect a fairly significant 13% YoY decline as CBIP’s tax benefits are slated to expire in 2015.

Valuation  Maintain our TP of RM2.05 based on unchanged Fwd. PE of 13x on FY15E core EPS of 15.8 sen.

 As it is, we are applying high PERs of 13x Fwd. PE which is at a 30% premium to both the FBMSC Index and their historical average Fwd PER of 10x, given CBIP’s sizeable outstanding orderbook above RM500m. Even so, our TP only offers a total return of 1.5%. We see no reason to raise our TP further given declining profit trends in FY15.

Risks to Our Call  Higher-than-expected margin for POME division.  Higher-than-expected sales or margin from RSPV division. 

Source: Kenanga