Period

2Q15/1H15

Actual vs. Expectations

CB Industrial Product (CBIP)’s 1H15 core net profit (CNP*) of RM37.3m made up 44% of both consensus (RM83.8m) and our forecast (RM84.4m).

We deem this as broadly within expectations as historically 1H on the average contributed 43% of full-year earnings in the last 5 years.

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 1H15 CNP declined 17% mainly on a higher effective tax rate (17% vs 7%) as CBIP’s Pioneer tax status ended in 1Q15. Otherwise, PBT was flat at RM48.7m as stronger Palm Oil Mill Equipment (POME) segment’s PBT (+11% to RM51.4m) was offset by poor Retrofitting Special Purpose Vehicle (RSPV) segment’s PBT (-58% to RM1.7m) due to lower project billing.

QoQ, 2Q15 CNP fell 18% to RM16.8m due to higher tax as mentioned, but PBT improved 4% to RM24.8m on higher POME segment’s PBT (+6% to RM26.5m) exceeding the drop in RSPV’s PBT (- 92% to RM0.1m).

Outlook

Near-term outlook is neutral as we expect CBIP’s solid POME segment’s growth to be limited by volatile RSPV earnings.

However, we are optimistic on CBIP’s mid-term outlook due to the strong pace of orderbook replenishment at more than RM250m YTD, or 56% of our FY15E orderbook replenishment of RM450m. This will provide good earnings visibility up to late-2016.

Change to Forecasts

FY15-16E earnings lowered 5% to RM80.3m- RM112.8m as we cut our RSPV segment’s revenue forecast to RM244.2m-RM256.5m (-24%) reflecting softer YTD RSPV orderbook.

Rating

Maintain OUTPERFORM We believe CBIP holds better upside prospects than many plantation companies due to its orderbook-based earnings. We also like CBIP for its strong balance sheet with net cash of RM155.9m or 29.4 sen per share.

Valuation

We lower our TP to RM2.13 (from RM2.49) based on a lower Fwd. PER of 11.7x (from 13.0x) on lower average FY15-16E EPS of 18.2 sen (from 19.0 sen). Our target Fwd. PER is reduced to 11.7x as we lower our valuation basis to +0.5SD (from +1.0SD) to reflect unstable RSPV segment’s earnings. However, we remain positive overall on CBIP as the POME segment makes up almost 90% of group earnings. Note that the POME segment’s orderbook status remains robust, with earnings that are less volatile compared to the plantation sector.

Risks to Our Call

Lower-than-expected margin for POME division.

Lower-than-expected sales or margin from RSPV division

Source: Kenanga Research - 19 Aug 2015