Period

3Q15/9M15

Actual vs. Expectations

CB Industrial Product (CBIP)’s 9M15 core net profit (CNP*) of RM51.3m constituted 63% of consensus forecast (RM81.0m) and 64% of ours (RM80.3m).

We deem this as broadly in-line as we expect 4Q15 earnings to recover on stabilising and improving CPO prices (4Q15 quarter to date: +6% to RM2,181/MT). Tax rate in 4Q15 should also normalise towards the corporate tax rate (25%).

Dividends

A second interim dividend of 3.0 sen was announced raising YTD DPS to 6.0 sen, which is higher than our FY15E DPS of 5.0 sen. This implies a 40% payout and 3.1% dividend yield.

As the YTD payout ratio is in line with the 3-year average (35%), we anticipate no further dividend payments for the rest of FY15.

Key Results Highlights

YoY, 9M15 CNP declined 27% mainly on a higher effective tax rate (23% vs 8%) as CBIP’s Pioneer tax status ended in 1Q15. Otherwise, PBT was only 3% lower on weaker Retrofitting Special Purpose Vehicle (RSPV) segment’s PBT (-52% to RM4.9m) due to slower project implementation. This was partly offset by POME segment’s PBT (+4% to RM70.1m) improvement due to favourable foreign exchange gains and slightly better margins (+1% to 24%).

QoQ, 3Q15 CNP fell 16% due to higher tax rates (35% vs 29%), but PBT was flat at RM24.8m driven by RSPV PBT improvement (RM3.2m from RM0.1m) and lower Plantation segment’s losses (RM0.3m from RM2.6m). However, this was offset by weaker POME segment PBT (-29% to RM18.7m) in light of soft CPO prices recently which slowed project implementation.

Outlook

We remain optimistic on CBIP’s mid-term outlook due to the brisk pace of orderbook replenishment at more than RM300m as of 3Q15, or 67% of our FY15E orderbook replenishment of RM450m. This will provide good earnings visibility up to late-2016.

Change to Forecasts

No change to our FY15-16E forecasts.

Rating

Maintain OUTPERFORM We believe CBIP holds better upside potential than many plantation companies due to its orderbook-based earnings. We also like CBIP for its strong balance sheet with net cash of RM128.4m or 24.4 sen per share.

Valuation

We firm up our TP to RM2.49 (from RM2.13) based on an unchanged Fwd. PER of 11.7x and higher EPS of 21.3 sen (from 18.2 sen) as we roll forward our valuation base year to FY16E (from average FY15- 16E). Our target Fwd. PER of 11.7x is based on +0.5SD, reflecting the POME segment’s robust orderbook status 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 Nov 2015