CB Industrial Product (CBIP)’s 1Q16 Core Net Profit (CNP*) of RM14.1m missed our (13%) and market (13%) forecasts on lower progress billings and losses on short-term investments. Interim dividend of 3.0 sen is inline. We lower RSPO orderbook assumptions which in turn reduced FY16-17E CNP by 11-10%. As a result, TP is lowered to RM2.34 (from RM2.49), but we maintain OUTPERFORM as Palm Oil Mill Equipment (POME) segment should see a pickup on stronger USD and stable cost structure.

Below expectations. 1Q16 CNP missed both consensus (RM105.4m) and our (RM112.9m) forecasts at 13% and 12%, respectively. This was mainly due to weaker-than-expected revenue in the Retrofitting Special Purpose Vehicles (RSPV) segment, which declined 46% against 1Q15 on lower progress billings. This was compounded by a fair value loss on short-term investments of RM3.0m.

Softer margins. 1Q16 CNP weakened by 31% year-on-year (YoY) and 71% quarter-on-quarter (QoQ) as PBT margin weakened by 8.4% YoY and 21.7% QoQ on investment losses. Palm Oil Mill Equipment (POME) PBT declined 22% YoY, but excluding short-term investment losses, PBT decline was lower at -6%. QoQ, POME PBT declined 44% (ex-investment gains/losses) on lower progress billings. Meanwhile, RSPV revenue was sharply lower at -46% YoY and -84% QoQ, although PBT was slightly higher YoY (+7%) on better project management. Plantation segment’s LBT was slightly higher at RM7.2m against 1Q15’s RM0.9m LBT and 4Q15’s RM2.9m on forex losses of c.RM5.0m.

Good outlook on POME segment. We remain optimistic on CBIP’s POME prospect as we understand that its orderbook at c.RM500m should sustain earnings for the next 2-3 years. Demand should be supported by stable CPO prices above RM2,500/metric ton (MT) since mid-March, while margins should improve on a strengthening USD, as we gather that c.40% of CBIP’s orderbook is denominated in USD.

Lower FY16-17E CNP by 11-10% to RM100.4-112.4m, as we adjust our RSPV orderbook replenishment assumptions by RM50m to RM100-150m (from RM120-180m) and adjust our Plantation production assumption to incorporate weather impact.

Maintain OUTPERFORM with lower TP of RM2.34 (from RM2.49) as we account for lower earnings and roll forward our valuation base year to 1H17 (from FY16) for lower applied EPS of 20.0 sen (from 21.3 sen). Target PER at 11.7x is maintained with an unchanged valuation basis of +0.5SD, reflecting the robust POME orderbook status which is less volatile against the plantation sector. We maintain our OUTPERFORM call as we like CBIP’s long-term earnings visibility and strong balance sheet with net cash of RM133.0m or 25.3 sen per share.

Source: Kenanga Research - 27 May 2016