News

CB Industrial Product Holding (CBIP) announced that it has been awarded a contract from PT Sinar Mas Group (Sinar Mas) to build a 40/80 MT/hour palm oil mill and bulking station in Liberia. We gather that the value of the contract is USD21.0m or RM74.9m.

Comments

We are positive on the faster-than-expected contract flow as this is CBIP’s third contract announcement within a space of two months. The contract makes up 23.0% of our FY15E orderbook replenishment assumption.

YTD contract flow at RM181.5m makes up 56.0% of our orderbook replenishment assumption, putting CBIP ahead of schedule in terms of replenishment.

Assuming EBIT margin of 22.0% for this RM74.9m project, it should translate into RM16.5m to its bottom line. Our assumption is in line with palm oil mill equipment (POME) segment margin of 22.0% in FY14.

Outlook

The contract further boosted CBIP’s total outstanding orderbook to above RM500.0m. This means earnings visibility until 4Q15 for its POME division.

Forecast

We revise up our FY15-16E orderbook assumptions to RM450.0m-RM500.0m (from RM325.0m- RM350.0m) as we expect CBIP to continue ramping up its orderbook to offset the effect of its Pioneer tax status ending in mid-2015.

However, we understand that much of the FY15E orderbook replenishment is targeted to begin recognition at year-end and in FY16. Hence we expect much stronger earnings growth in FY16.

Maintain our FY15E earnings at RM84.0m but upgrade FY16E earnings to RM117.0m (from RM105.0m).

Rating

Upgrade to OUTPERFORM We believe CBIP holds better upside prospects than many plantation companies due to its orderbookbased earnings. With its rapid pace of orderbook replenishment providing better earnings visibility, we upgrade our call on CBIP to OUTPERFORM (from MARKET PERFORM).

Valuation

We increase our TP to RM2.46 (from RM2.32) based on an unchanged Fwd. PER of 13.0x on higher 1H16 Core EPS of 19.0 sen (from 17.9 sen). Our 13.0x Fwd. PE implies a +1.0SD valuation on 3-year historical average PER which is justified by CBIP’s lower earnings volatility compared to the plantation sector, and strong orderbook status.

Risks to Our Call

Lower-than-expected contract win for its POME division.

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

Lower-than-expected CPO prices.

Source: Kenanga Research - 6 May 2015